PRE-BUDGET MEMORANDUM - 2020
DIRECT TAXES
AND
INTERNATIONAL TAXATION
THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA
NEW DELHI
The Institute of Chartered Accountants of India
PRE-BUDGET MEMORANDUM 2020
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 - 2020 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 2020-21.
1.2 The suggestions have been broadly categorized under the following heads:
Part A : Suggestions relating to the policy & provisions of Income-tax Act, 1961
Part B : Suggestions for improving Tax Administration and Citizen Services
Part C : Suggestions pertaining to International Taxation
1.3 The suggestions are given Chapter wise and are intended to serve the following purpose:
I. Improve tax collection.
II. Reduce/minimize litigations
III. Rationalization of the provisions of direct tax laws.
IV. Removal of administrative and procedural difficulties relating to Direct Taxes
V. Check tax avoidance
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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, being 11
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- 13
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 13
4. 14
Section 10(23C) - Mandatory application of income by charitable trusts/ institutions
5. Section 10(23C) - Annual Receipts 14
6. Section 10(23C) - Rationalisation of Provisions 15
7. Section 10(23FB) - Tax exemption for Alternative Investment Funds Venture 16
Capital Funds
8. Section 10(32) - Income of minors - to increase exemption limits 17
9. Section 12AA Status of registration application 17
CHAPTER IV COMPUTATION OF TOTAL INCOME
10. Deduction to salaried assesses - Payment for notice period 19
11. Section 23(1)(c) Vacant house property 19
PART D PROFIT AND GAINS OF BUSINESS AND PROFESSION
DETAILED SUGGESTIONS
12. Section 28(iiia) Sale of license 21
13. Section 28(iiid) Duty Entitlement Pass Book Scheme no more in 21
existence
14. Section 28(va) Taxability of non-compete fees in the hands of payer 21
15. Section 28(via) - Conversion of Stock-in-trade into Capital Asset 22
16. Section 32 - Depreciation in case of slump sale 22
17. Section 32AC - Slump Sale and investment allowance 24
18. Section 35AD - Expenditure on Specified Business 26
19. Section 35D - Amount paid for increase in authorized capital 26
20. Due date for crediting the contribution of employees to the respective fund 27
Section 36(1)(va) read with Section 2(24)(x)
21. Section 37 Corporate Social Responsibility expenditure 28
22. Section 40(b)(v) Raise in allowable expenses in the form of remuneration 29
to working partner
23. Explanation 5 to Section 43(1) "building" to be replaced by "assets" 29
The Institute of Chartered Accountants of India
24. Section 44AD -Presumptive Income Some Issues 30
25. Benefit of presumptive taxation to LLP - Section 44AD 30
26. Section 44ADA - Special provision for computing profits and gains of profession on 31
presumptive basis Issues and concerns arising there from to be addressed
(a) Threshold limit of Rs 50 lakhs may be increased 31
(b) Rate of estimated tax @ 50% too high 32
PART E CAPITAL GAINS
27. Limited Liability Partnership (LLP) 33
(a) Section 47 Insertion of clause (viab) to provide exemption in respect of transfer of
capital asset consequent to amalgamation of foreign companies - Consequent
exemption to be provided in respect of transfer of shares by resident shareholders
(b) Consequential amendment required in section 47(xiiib) 34
(c) Section 47(xiiib) - Conversion of company into LLP Clarification required relating 34
to additional condition
28. Sections 47(x) & (xa) and 49(2A) - Capital Gain on Conversion of Foreign Currency 35
Exchangeable Bonds (FCEB) and other Bonds & Debentures
29. Section 54EC - Time Limit for investment in specified bonds 36
30. Section 55(2)(ac) Clarification required to determine the cost of acquisition in case of 38
Merger/Demerger etc.
31. Reference to the Valuation Officer - Section 55A 42
PART F INCOME FROM OTHER SOURCES
32. Definition of the term relative - Explanation to Section 56(2) (vii) 43
33. Section 56(2)(x) Clarification w.r.t. issue of shares 43
34. Section 56(2)(x) Certain exceptions to be provided w.r.t. conversion 44
CHAPTER VI AGGREGATION OF INCOME AND SET OFF OR CARRY FORWARD OF LOSS
35. Section 71(3A) - Loss from House Property 46
36. Section 72A - Carry forward of losses in case of amalgamation or merger for service 46
industry
37. Section 78 Issue of carry forward and set off of losses of an LLP 47
38. Section 79 47
(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 49
subsidiaries pursuant to resolution plan
39. Section 79 - Carry forward and set-off of losses in certain cases 51
CHAPTER VIA DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME
PART B DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
40. Section 80-IBA Need to prescribe a form/certificate 53
41. Section 80C various suggestions 53
42. Section 80EEA - Tax incentive for affordable housing 55
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43. Section 80EEB- Tax incentive for electric vehicles/Deduction in respect of purchase of 60
electric vehicle
PART C DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
44. Section 80PA Applicability of MAT 62
45. Deduction in respect of interest on deposits in savings account - Section 80TTA 63
46. Section 80TTB Deduction in respect of interest on deposits in case of senior citizens 64
Request to extend the benefit by including interest on National Savings Certificate
within the ambit of section 80TTB
47. Section 80U Consequential amendments required due to the enactment of `The 64
Rights of Persons with Disabilities Act, 2016' w.e.f. 28.12.2016
CHAPTER X SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX
48. Domestic Transfer Pricing [DTP] Sections 92, 92BA, 92C, 92CA, 92D & 92E 67
a) Arm's Length Price vs Ordinary Profits
b) Advance Pricing Agreements 67
c) Documentation Requirements 67
CHAPTER XII DETERMINATION OF TAX IN SPECIAL CASES
49. Section 115BAB(2)(b) -scope may be enlarged 69
50. Section 115BBDA 69
(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 69
51. Section 115BBF Rationalizing patent tax regime 70
52. Section 115BBE Need to reconsider the high rate of tax 71
53. Section 115BBG - Income from transfer of carbon credits to be taxed @ 10% - 71
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
54. Section 115JB - Insertion of clause (iih) in Explanation 1 to section 115JB - Downward 74
adjustment of aggregate brought forward losses and depreciation u/s 115JB
55. Section 115JB -Minimum Alternate tax 75
56. Section 115JB MAT implications for Ind AS compliant companies 76
CHAPTER XII-D SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED PROFITS OF
DOMESTIC COMPANIES
57. Section 115-O - DDT on deemed dividend u/s 2(22)(e) 78
58. Section 115-O - Grossing up of rate of dividend distribution tax 80
59. Section 115-O - Dividend Distribution Tax 81
CHAPTER XII- SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED INCOME OF
DA DOMESTIC COMPANY FOR BUY-BACK OF SHARES
60. Section 115QA Effect on foreign investments 84
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CHAPTER XII- SPECIAL PROVISIONS RELATING TO TAX ON ACCREDITED INCOME OF
EB CERTAIN TRUSTS AND INSTITUTIONS
61. a) Recovery provisions on trustees etc. Section 115TD(5) 87
b) Section 115TD(5) - Period of 14 days insufficient 87
CHAPTER XIV PROCEDURE FOR ASSESSMENT
62. Seventh proviso to section 139(1) Mandatory furnishing of return of income - Deposit 90
amount exceeding one crore rupees in current account may be made applicable to all
types of accounts
63. Explanation 2 to section 139(1) Need to synchronize due date of partner with that of 91
Firm liable for domestic transfer pricing provisions
64. Section 139(4) A reasonable penalty may be imposed for belated filing after expiry of 92
time allowed
65. Section 139(4) and 139(5) Time limit for filing belated return reduced - Reference to 92
return in response to section 142(1) may be included in Sections 139(4) and 139(5)
66. Section 139A Amendment / surrender of PAN 93
67. Section 139A Need for certain persons to mandatorily have PAN 93
68. Section 142A - Estimation of value of asset by Valuation Officer 94
69. Section 148 - Reasons for reopening to be sent along with notice for reopening of 95
assessment
70. Credit of Tax Collected at Source relating to earlier years (for which Assessments are 96
already over & time period mentioned in Section 155(14) has elapsed) demanded by
the Government authorities at a later date
71. Section 159 - Hardship in obtaining `Legal Heir Certificate' for the purpose of registering 96
deceased assessee's legal heir as representative assessee for e-filing of tax returns of
a deceased assessee
72. Section 171 - Assessment after partition of a Hindu undivided family 98
CHAPTER-XVII COLLECTION AND RECOVERY OF TAX
PART B DEDUCTION AT SOURCE
73. Section 192 Need for clarity on TDS on family pension 100
74. Section 193 - No tax withholding on `interest on securities' earned by a business trust 100
defined as per section 10(23FC)
75. Section 194A- TDS on compensation received under Motor Vehicles Act 101
76. Section 194A Need to raise threshold limit from 5,000 to Rs 10,000 104
77. Section 194A - Interest payments to NBFC 104
78. Section 194H Request to increase TDS exemption limit to Rs 40,000 105
79. Section 194-IA- Issues 107
80. Section 194-IA Reduction in threshold limit to Rs. 30,00,000 107
81. Section 194J - Fees for professional or technical services 108
82. Section 194N - Practical difficulties to be faced and clarifications required regarding 108
implementation of proposed provision of TDS @ 2% on cash withdrawals exceeding Rs
1,00,00,000
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83. Section 197A Certain assessees may be allowed benefit 110
84. Section 197A - Rationalizing TDS applicability on Merchant Discount Rate (`MDR') 111
85. Section 204 Issue w.r.t. appeal filing by Principal Officer u/s 201/201A 113
86. TDS on Recharge Vouchers 113
87. Section 206C(1F) to increase scope of TCS to all transactions of goods/services 114
PART C ADVANCE PAYMENT OF TAX
88. Section 208 -Revision of Limit of advance tax 115
PART G LEVY OF FEE IN CERTAIN CASES
89. Section 234E Day wise slab 116
CHAPTER XX APPEALS & REVISION
90. Section 246A Necessary amendment required enabling filing of Appeal against 118
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
91. Section 269ST - Issues(i), (ii) 120
CHAPTER XXI PENALTIES IMPOSABLE
92. Section 270A inserted to provide for levy of penalty in case of under reporting of 122
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 122
c) Order to specify the specific clause of under -reported or misreported income for levy 124
of penalty under section 270A
d) Mere making of a claim which is not sustainable in law would not tantamount to 125
furnishing inaccurate particulars for attracting levy of penalty
93. Section 270AA - Immunity from Imposition of penalty 125
94. Section 271AAB - Need to simplify penal provisions 126
95. Section 271AAB -Penalty where search has been initiated 126
96. Rationalization of Section 271D & 271E 127
97. Section 271FA Clarity required regarding appealability of penalty order 128
98. Section 271H - Penalty for failure to furnish TDS/TCS statements 130
99. Genuine hardship faced by tax deductors on account of provisions of section 276B of 132
the Income-tax Act, 1961 attracting prosecution proceedings for delay in remittance of
tax to the credit of the Central Government
100. Section 276CC Amendment w.r.t. clarification regarding inclusion of amount of 134
advance tax paid and tax collected at source may be made applicable with
retrospective effect
101. Chapter XXII - Prosecution proceedings not to be imposed in case tax and interest paid 134
CHAPTER XXIII MISCELLANEOUS
102. Section 288 - Appearance by Authorized Representative 137
103. Request to consider amendment in Explanation to section 288(2) pertaining to 137
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definition of `Accountant'
104. Computation of MAT profit in case of companies undergoing Corporate Insolvency 142
Resolution Process under the Insolvency Code, 2016
105. Conversion of convertible notes into shares 143
106. Section 43CA, 50C and 56 Allowance of variation of 5% between stamp duty value 143
and the sale consideration Increasing the permissible variation and need for
retrospective amendment
107. Exemptions Skill Development 144
108. Tracking the un-spent portion of capital gain deposit Levy TDS at the time of 145
withdrawal
OTHERS
109. Issues arising from applicability of Companies Act, 2013 - Amalgamation 147
PART B SUGGESTIONS FOR IMPROVING TAX ADMINISTRATION AND CITIZEN
SERVICES
110. Section 154 - Mistake apparent from record 149
111. Section 154/155(14) - Different Methods of accounting followed by the deductor and 149
deductee Rule 37BA
112. Section 200 -Furnishing of TDS returns 151
113. Time to bring an amnesty scheme on the lines of Sabka Vishwas (Legacy Dispute 151
Resolution) Scheme, 2019
114. Tax consolidation Scheme 152
115. Need to reduce tax rate of partnership firms in line with corporate tax rate reduction 153
116. Rule 31 - TDS credit should be allowed solely on the basis of Form No. 26AS and 154
procedural requirements for issuance of TDS certificates (Form No. 16 / 16A) should be
dispensed with
117. Reconciliation of each payment made by deductor to avoid duplication of work of TDS 157
return
PART C SUGGESTIONS PERTAINING TO INTERNATIONAL TAXATION
118. Place of Effective Management (POEM) 162
119. Provisions regarding indirect transfer of capital asset situated in India - Section 9 162
120. Section 9(1)(i) - Benefit of non-applicability of indirect transfer provisions in case of 165
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
121. Scope of Royalty Income - Section 9(1)(vi) 166
122. Explanation 5 to Section 9(1)(vi) e commerce services 169
123. Tax withholding on transponder hire charges - Section 9(1)(vi) Explanation 6 170
124. Section 9(1)(i) Explanation 6(b) 172
125. Definition of Significant Economic Presence (SEP) for the purpose of business 173
connection
126. Introducing safeguards while applying Principal Purpose Test under the tax treaty 174
127. Grandfathering of Principal Purpose Test application 174
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128. Carry forward of excess foreign tax credit 174
129. Tax Sparing Credits 175
130. Disallowance for TDS defaults on payments to non-resident Section 40(a)(i) 175
131. Cross-border merger 176
132. Master File Regulations 179
133. Reporting of issuance of Share Capital Transaction in Form 3CEB 180
134. Advertising Marketing & Promotion Expenses (AMP) 181
135. Permissible variation available in case of Single comparable used determining the 181
arm's length price
136. Section 92C(2) and Rule 10 CA - Range concept 182
137. Tolerance Band Second proviso to section 92C(2) 183
138. Mutual Agreement Procedures (MAP) 183
139. Section 92CE - Introduction of secondary adjustment 183
140. Advance Pricing Agreements (`APA') 189
141. Rollback of APA 190
142. Dispute resolution 191
143. Section 94A -Special measures in respect of transactions with persons located in 191
notified jurisdictional area
144. Section 94B - Limitation of interest benefit provisions introduced certain concerns to 191
be addressed
145. Section 95 Applicability of GAAR to be effective from A.Y.2018-19 - Protection from 201
applicability of GAAR should not be restricted to only investments, but may extend to
all transactions upto 31.03.2017
146. Section 95 - General Anti-Avoidance Rule 201
147. Section 115JAA(2A) - Restriction on carry forward of MAT/AMT credit and claim of FTC 204
in relation to taxes under dispute - Restriction to be removed
148. Section 139(5) Reduction in time limit for filing revised return Request to bring back 205
erstwhile time limit for filing of revised tax return at least in cases of claim of foreign tax
credit
149. Application for Permanent Account Number (PAN) in certain cases 205
150. Section 155(14A) - Claim of FTC pertaining to taxes which are under dispute in the 206
foreign country Clarification required on certain issues relating to period of limitation
and documents which shall constitute evidence of settlement
151. Section 194LC - Income by way of interest from Indian Company 208
152. Section 194LC and Section 206AA - Scope of concessional rate of tax on overseas 209
borrowings
153. Section 194LD - Income by way of interest on certain bonds and Government 211
securities
154. Section 195 212
a) Scope and applicability
b) Time limit for Issuance of "general or special order 213
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c) Withholding tax on reimbursements - Section 195 213
d) Consequential amendment required in section 204 213
e) Section 195 - Clarification required 214
f) Applicability of Rule 37BB read with Section 195 for making remittances outside India 215
g) Penalty for failure to furnish information or furnishing inaccurate information under 216
Section 195
155. Section 201 Limitation period for Non-resident 217
156. a) Relieve return filing obligation if royalty/ FTS/ capital gains has suffered TDS and 217
also clarify that s.206AA(7)(ii) read with Rule 37BC has retrospective effect
b) PAN for foreign parties i.e. non-residents 218
157. TDS on interest on NRO account 218
158. Equalization levy 218
159. Chapter VIII of the Finance Act, 2016 - Equalisation Levy - Issues to be addressed 219
160. Tax consolidation Scheme 220
161. Deputation of employees - [Taxability as fees for technical services/ Permanent 224
Establishment issues]
162. TDS on payment made to non-residents 224
163. Time limit for TDS assessments of payments made to non-residents 225
164. Provision for the employer to provide tax treaty benefits while calculating TDS 225
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PART A
SUGGESTIONS RELATING TO THE POLICY &
PROVISIONS OF INCOME-TAX ACT, 1961
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CHAPTER I
PRELIMINARY
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
1. Section 2(42A) The Finance Act, 2017 amended section It is suggested that consequential
Reduction in holding 2(42A) so as to reduce the period of amendments may be made in
period in case of holding from the existing 36 months to 24 sections 54, 54B, 54D & 54F so
immovable property, months in case of immovable property, as to enable the holding period
being land or being land or building or both, to qualify as of the new asset purchased to
building or both, to long-term capital asset. The same is done be reduced to 2 years from 3
qualify as long-term to promote the real estate sector and to years in case of land and/or
capital asset make it more attractive for investment. building.
Consequential Issue
amendments to be
Consequential amendments for reducing (SUGGESTION FOR
made in sections 54,
the holding period of immovable property RATIONALIZATION OF THE
54B, 54D and 54F
from 3 to 2 years is required to be made in PROVISIONS OF DIRECT TAX
sections 54, 54B, 54D and 54F in line with LAWS)
the amendment in section 2(42A). At
present, these sections restrict transfer of
new assets purchased for 3 years.
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Chapter III
INCOMES WHICH DO NOT FORM PART OF
TOTAL INCOME
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
2. Section 10(12A) For A.Y. 2018-19, section 10(12A) provides It is suggested that the
Extending the for an exemption of upto 40% of the total amendment as made in
benefit of tax- amount payable to an employee contributing section 10(12A) may also be
free withdrawal to the NPS on closure of his account or on his made in section 10(12B)
from NPS to opting out the scheme. Further, in cases of thereby extending the benefit
non-employee partial withdrawal from NPS, section 10(12B) of exemption in case of
subscribers provides for exemption of upto 25% of partial withdrawal to non-
under section contributions made by an employee. These employee subscribers as
10(12A) exemptions were, however, not available to well. The said amendment
Similar non-employee assessee contributing to NPS. would also be in line with the
amendment intention of the legislature to
may also be provide a level playing field
The Finance Act, 2018 has extended the
made in section to both types of subscribers
benefit of exemption under section 10(12A) to
10(12B) to NPS.
all assessees, in order to provide a level
playing field to both employee and non- (SUGGESTION FOR
employee assessee subscribers. RATIONALIZATION OF THE
However, the Finance Act, 2018 does not PROVISIONS OF DIRECT
contain a similar amendment in respect of TAX LAWS)
benefit of exemption under section 10(12B),
consequent to which such benefit of
exemption in case of partial withdrawal
continues to be restricted to employees alone.
To provide equity between the employee and
non-employee subscriber, similar amendment
may be made in section 10(12B) to extend
the benefit available thereunder to non-
employee subscribers.
3. Section 10(13) - Section 10(10AA) provides for exemption for Section 10(13) may be
Payment from payment received as cash equivalent of leave amended to exempt
approved salary in respect of earned leave period at commuted value received by
superannuation the time of retirement whether an employee from the
fund superannuation or otherwise . superannuation corpus
standing to his credit at the
Section 10(13) provides for exemption with time of voluntary retirement,
regard to payment from an approved by including the words "or
superannuation fund. Section 10(13)(ii) of the otherwise" in line with
Act provides for exemption in the hands of section 10(10AA) of the
the employee in respect of the amount Income-tax Act, 1961.
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Sr. Section Issue/Justification Suggestion
No
received on commutation of the annuity in (SUGGESTIONS FOR
case of retirement at or after a specified age RATIONALIZATION OF THE
or becoming incapacitated prior to such PROVISIONS OF DIRECT TAX
retirement. This provision however, does not LAWS)
cover commutation of an annuity paid on
voluntary retirement of the employee.
Section 10(10AA), as mentioned above, has
taken care of such case by using the
terminology "or otherwise". Since th e
intention of the law makers is clear by the
wordings of section 10(10AA), section
10(13)(ii) may be appropriately amended to
include the words "or otherwise". This will
provide relief to genuine taxpayers who are
taking voluntary retirement.
4. Section 10(23C) - Application of income is mandatory by Section 10(23C) should be
Mandatory charitable trusts/institutions including those amended to specifically
application of enjoying benefits under section 10(23C) to its exclude 'corpus donations'
income by objects, subject to accumulation of not more from the requirement of
charitable trusts/ than 15% of its income including income from mandatory application of
institutions voluntary contributions. Similar provisions income by such trusts /
under section 11(1) read with section 12(1) institutions.
exclude 'corpus donations' (voluntary (SUGGESTIONS FOR
contributions made with a specific direction RATIONALIZATION OF THE
that they shall form part of the corpus of the PROVISIONS OF DIRECT TAX
trust or institution) from the mandatory LAWS)
requirement of application of the income. No
such provision has been made in section
10(23C). This will compel the Institutions
coming within the scope of section 10(23C) to
apply even their corpus donations to the day
to-day activities for getting the exemption.
This will be prejudicial to them because they
cannot build up the corpus fund.
5. Section 10(23C) - Under section 10(23C)(iiiad) and (iiiae) of It is suggested that "Annual
Annual Receipts Income-tax Act, it is provided that the income Receipts" be clearly defined
of University/Educational as income of the hospitals/
institutions/hospitals/ other institutions educational institutions
specified therein will be exempt provided they arising regularly/every year
comply with the conditions stipulated therein. but excluding value of
Also, it is provided that "aggregate annual donation received in kind by
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Sr. Section Issue/Justification Suggestion
No
receipts" of such institutions shall not exceed way movable assets, land,
the amount of annual receipts as may be hospitals/educational
prescribed. Though annual receipts have equipment, sale
been prescribed as Rs.1 crore vide Rule 2BC consideration received on
of Income-tax Rules, the word "annual disposal of land, shares or
receipts" have not been defined in the other movable property,
Income-tax Act. hospital/educational
It is not clear as to whether: equipment etc.
(a) for computing "annual receipts" only the Further, it may be specifically
receipts of such institutions from provided that donations
educational/hospital activities alone are received towards corpus by
to be considered each year; way of land, movable assets
(b) Certain receipts of such institutions that are excluded from
are not received on annual basis e.g. computation of "Annual
receipts from sale of property, equity Receipts" as prescribed
shares and other proceeds on divestment under Rule 2BC of Income-tax
are to be excluded from the computation Rules.
of "annual receipts"; (SUGGESTIONS TO REDUCE /
(c) In certain cases where such charitable MINIMIZE LITIGATIONS)
institutions receive donations in kind in
the form of land, movable assets etc.
whether "annual receipts" would exclude
such receipts since they are not received
annually.
6. Section 10(23C) - The 15th Proviso to Section 10(23C) states It is suggested that:
Rationalisation that application for obtaining approval under Such application should
of Provisions this section shall be made on or before 30 th be allowed to be made at
September of the relevant assessment year any time during the
from which the exemption is sought. For financial year for which
example, if an institution seeks approval for exemption is sought even
Financial year 2017-18, it will have to apply if the annual receipts
up to 30 th September 2018. have not exceeded or is
Further, the 9 th proviso to Section 10(23C) not expected to exceed
states that order granting approval or the limit of Rs 1 crore.
rejection shall be passed within 12 months Time limit for granting
from the end of month in which such approval may be reduced
application was received. from 12 months to "within
In view of this proviso, in respect of 4 months from the end of
applications received on 30 th September the month in which
2018, the order has to be passed on or before application has been
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Sr. Section Issue/Justification Suggestion
No
30th September, 2019. So the status of the filed", so that any
application is not known till next 12 months institution should be well
i.e. for 2 financial years. aware of its status before
If such institution is not granted approval as due date of filing its
on 30th September 2019 then it will have to income tax return.
pay income tax for Financial year 2017-18 (SUGGESTION FOR
and 2018-19. Resultantly, the charitable RATIONALIZATION OF THE
institution will have to face heavy tax burden. PROVISIONS OF DIRECT
At the same time, it is to be noted that ITD TAX LAWS)
doesn't accept such application before close
of financial year i.e. application for F.Y. 2017-
18 cannot be made on or before 31 st March
2018, though there is no such restriction
under the Act.
7. Section 10(23FB) - Earlier under Section 10(23FB) of Income-tax It is suggested that section
Tax exemption for Act, any income of a Venture Capital 10(23FB) be reworded as
Alternative Company (VCC) or Venture Capital Fund follows:
Investment Funds (VCF) set up to raise funds for investment "Any income of a venture
Venture Capital was exempt from taxation. However, in 2007, capital company or
Funds this was amended and the scope of VCC /
venture capital fund from
VCF was narrowed down to select sectors
investment set up to raise
and the exemption from income tax was
funds for investment in a
limited to "any income of a VC company or
VC fund from investment in a venture capital venture capital
undertaking". undertaking."
The sectoral restriction stands removed in (SUGGESTIONS FOR
Union Budget, 2012 which was a welcome RATIONALIZATION OF THE
move. However, the tax exemption still PROVISIONS OF DIRECT TAX
remains limited to "any income of a VC LAWS)
company or VC fund from investment in a
venture capital undertaking". Keeping in mind
the growing importance of VC funds in
infrastructure and also in other important
sectors of our economy, the previous wording
of "set up to raise funds for investment" needs
to be restored in place of "from investment"
under Section 10(23FB).
A change in the wording from "any income of
a VC company or VC fund from investment" to
"any income of a VC company or VC fund set
up to raise funds for investment" will enable
the VCC / VCF to undertake analysis / study
Page 16 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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Sr. Section Issue/Justification Suggestion
No
necessary to evaluate the project viability as
well as to render other services for the
projects in which investments are made.
Restricting the wording to "any income of a
VC company or VC fund from investment"
severely restricts the tax exemption thus
affecting the commercial viability of the VCC /
VCF.
8. Section 10(32) - At present income of minors included in the It is suggested that this
Income of minors hands of parents is exempt to the extent of should be raised to at least
- to increase Rs.1,500/- for each minor. The average Rs. 5,000/- for each minor
exemption limits expenditure to meet cost of a minor's child.
education/health/living expenses which has (SUGGESTIONS FOR
gone up considerably in recent years, limit of RATIONALIZATION OF THE
Rs.1,500/- fixed is woefully inadequate. PROVISIONS OF DIRECT TAX
LAWS)
9. Section 12AA If the order for granting or refusal of It is suggested to insert a
Status of application for registration of trust or proviso to section 12A/12AA
registration institution u/s. 12A is not passed within 6 such that non-disposal of
application months, status of registration cannot be application for registration
defined. Some judgments pronounced that it u/s. 12A within prescribed
will be considered as deemed registration, period will be considered as
while some judgments are against this view. deemed registration.
To minimize litigation, certain amendment (SUGGESTIONS FOR
needs to be made in existing provisions. RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 17
The Institute of Chartered Accountants of India
CHAPTER IV
COMPUTATION OF TOTAL INCOME
Page 18 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
PART A-SALARIES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
10. 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.
11. Section 23(1)(c) Vacant property even if given on rent in the The provisions of Section
Vacant house earlier year is being taxed as deemed let out 23(1)(c) need to be elaborated
property and a notional income is being attributed to such and an explanation inserted
a property. to avoid unnecessary
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 19
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
The increase in the number of self-occupied litigation. Even though the
properties has been increased to two to section is very clear, the
encourage the real estate industry. department continues to tax a
However, the restriction on the number of self- property that is lying vacant
occupied properties to two may be relooked and even though it was rented out
revisited. No prudent business person will invest in the previous year.
in a property and not seek a return on his/her (SUGGESTIONS FOR
investment unless it is being used for self- RATIONALIZATION OF THE
occupation either when on business or for PROVISIONS OF DIRECT TAX
leisure .It should be the prerogative of the LAWS)
assessee to decide the number of properties he
can hold.
Page 20 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
PART D-PROFIT AND GAINS OF BUSINESS AND PROFESSION
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
12. 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.
13. 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.
14. Section 28(va) Section 28(va) provides for the taxability Considering the
Taxability of of amount received as non-compete fees differing judgements
non-compete in the hands of recipient. by various courts on
fees in the However, its taxability in the hands of the issue of payment
hands of payer payer is not yet defined and amenable to of non-compete fees, it
interpretations. In fact, there are differing is suggested that
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 21
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
judgements by different high courts suitable legislative
regarding the taxability of non-compete amendment be made
fees in the hands of payer. clarifying the
Both Gujarat High Court (CIT v treatment of such
Ferromatice Milacron India P. Ltd, [2018] expenditure in the
99 taxmann.com 154 (Guj.)) and Bombay hands of payer.
High Court (PCIT v Piramal Glass Limited, (SUGGESTIONS TO
ITA No. 556 of 2017) had held that non- REDUCE / MINIMIZE
compete fees are eligible for depreciation LITIGATIONS)
thereby treating the payment of such fees
as capital asset (an intangible asset).
However, Madras High Court (Asianet
Communications Ltd, TS-429-HC-
2018(MAD)) has held that non-compete
fee paid to a director is a deductible
revenue expenditure.
15. Section 28(via) Vide the Finance Act, 2018, as per section It is suggested to
- Conversion 28 of the Act when any stock-in-trade is provide deferment of
of Stock-in- converted into capital asset, the same will payment of tax on
trade into be subject to tax in the following manner business income from
Capital Asset i) Business Income: Fair Market conversion of stock-
value on the date of conversion in-trade to capital
determined in the prescribed manner less asset till the final
cost of inventory converted into capital disposal of such
asset. capital asset to avoid
hardship of payment
ii) Capital Gain: Sale Consideration
of tax on unrealized
less Fair Market Value on the date of
gain and bring parity
conversion as determined in the
with the method
prescribed manner.
adopted on conversion
of capital asset into
However, it is silent on when the tax is to stock-in-trade.
be discharged, whether on conversion or (SUGGESTION FOR
on sale of capital asset. Therefore, the IMPROVING TAX
difference would be taxable in the COLLECTION)
Previous Year in which the stock in trade
is converted into a capital asset.
16. Section 32 - The proviso to section 32 provides that the Section 32 may be
Depreciation in aggregate deduction, in respect of amended to clarify the
case of slump depreciation of buildings, machinery, plant legal position as to
sale or furniture, being tangible assets or know- whether depreciation
how, patents, copyrights, trademarks, can be claimed on the
Page 22 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
licenses, franchises or any other business basis of proportionate
or commercial rights of similar nature, number of days by the
being intangible assets allowable to the transferor and the
predecessor and the successor in the case transferee company in
of succession referred to in clause (xiii) case of slump sale
and clause (xiv) of section 47 or section also considering the
170 or to the amalgamating company and proviso to section 32
the amalgamated company in the case of read with section 170
amalgamation, or to the de-merged of the Act.
company and the resulting company in the (SUGGESTIONS TO
case of de-merger, as the case may be, REDUCE / MINIMIZE
shall not exceed in any previous year the LITIGATIONS)
deduction calculated at the prescribed
rates as if the succession or the
amalgamation or the de-merger, as the
case may be, had not taken place, and
such deduction shall be apportioned
between 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, in the ratio
of the number of days for which the assets
were used by them .
The following issues may be considered
for appropriate amendment in the law :
(a) An issue arises whether depreciation
can be claimed on the basis of
proportionate number of days by the
transferor and the transferee company in
case of slump sale considering the proviso
to section 32 read with section 170 of the
Act.
(b) As per the current provisions of proviso
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
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 23
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
difficulties, there may be a time gap
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 substituted in the proviso to
section 32.
17. 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
Section 32AC(2) provides that if the new 32AC(2) are not
asset (on which investment allowance applicable to any
benefit is availed) is sold or transferred transfer of assets
within a period of five years, the amount of including slump sale
deduction claimed in past shall deemed to between a parent and
be income of the tax payer in the year of a wholly owned
transfer. Only exception to this is where subsidiary which is
the asset is transferred in connection with exempt under section
amalgamation or demerger. 47.
A number of companies have availed the (SUGGESTION FOR
incentive by way of enhancing their capex RATIONALIZATION
(Capital expenditure). Such companies OF THE PROVISIONS
may need to re-organize internally for OF DIRECT TAX
reasons such as improving efficiency by LAWS)
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
may be time consuming, whereas a slump
Page 24 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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."
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
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 25
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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.
18. Section 35AD Section 35AD was introduced in the Act It is suggested that the
- Expenditure for the purposes of enabling a switch from benefit of section
on Specified profit linked incentives to investment 35AD(8) should be
Business linked incentives. This was done since extended to
profit based incentives were distorting the telecommunication
tax base. and allied service
Accelerated deductions @ 150% were companies
allowed under Section 35AD of the Act for
specified core businesses with effect from In addition to new
A.Y. 2010-11 with a view to creating rural entities incurring
infrastructure. capital expenditure,
Such incentive should be provided to even existing entities
telecom and allied businesses also that incurring capital
are essential for the growth of the expenditure for
economy. substantial expansion
Extension of benefit under section 35AD to of their essential core
telecommunications sector will ensure should also be allowed
creation of employment opportunities, the accelerated
greater penetration of telecom services, deductions as
infrastructure development and easy flow substantial capital
of foreign funds to capital intensive and infusion is required
debt ridden sector. periodically to sustain
their viability.
Also, investment based incentives such as
above do not put the Government in a (SUGGESTION FOR
disadvantageous position as these RATIONALIZATION
incentives only postpone the payment of OF THE PROVISIONS
taxes and give relief to the tax payers in OF DIRECT TAX
the initial years by granting deduction for LAWS)
the CAPEX which would have been
otherwise allowed by way of depreciation
over a longer period.
19. 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
Page 26 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
authorized deduction. companies for
capital After a company is incorporated with a increase in authorized
minimum paid up capital (for which there capital may be allowed
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
Fee on incorporation of a company is RATIONALIZATION
allowed as per specified limits in 5 OF THE PROVISIONS
installments u/s 35D, however amount OF DIRECT TAX
paid for increase in authorized capital is LAWS)
not allowed as deduction at all, though the
amount is paid to government as a fee.
20. 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) should 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
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 It may also be kept in
the employer after the due date is also mind that delay of few
NOT allowed as a deduction in the year of days should not debar
payment. This causes undue hardship to to claim the actual
the assessee especially during the expenditure under
economic turbulence. Income-tax law as due
Further, the Employer's contribution made interest is already
after the due date specified under the charged under
relevant social security legislation but relevant laws.
deposited within the due date of filing (SUGGESTIONS FOR
return of income are allowed under the Act RATIONALIZATION OF
by virtue of Section 43B. THE PROVISIONS OF
It may be noted that the statutory laws DIRECT TAX LAWS)
under the respective contribution schemes
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 27
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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.
21. Section 37 The Finance (No. 2) Act, 2014 had added These expenses are all
Corporate a new Explanation 2 in sub-section (1) of connected to social
Social Section 37 providing that any expenditure and charitable causes
incurred by an assessee on the activities and not for any
Responsibility
relating to CSR referred to in Section 135 personal benefit or
expenditure of the Companies Act, 2013 shall not be gain. It is, therefore,
deemed to be an expenditure incurred by fair to allow the same
the assessee for the purposes of the as business
business or profession and deduction shall expenditure. There is
not be allowed. no bar on allowability
of CSR expenditure
As per the Companies Act 2013, it is falling under other
mandatory for specified companies (as per sections like 35, 35AC
Section 135) to spend 2% of their average etc. There is a strong
profits towards Corporate Social need to revisit this
Responsibility. The CSR expenditure provision and the
incurred by a company will specifically be companies should be
treated as for non-business purpose hence allowed 100 per cent
will be disallowed other than those covered deduction of CSR .
u/s. 30 to 36 of the Act. In fact, ideally there
should be no bar on
allowability of CSR
expenditure under the
Act.
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Sr. No Section Issue/Justification Suggestion
(SUGGESTION FOR
RATIONALIZATION
OF THE PROVISIONS
OF DIRECT TAX
LAWS)
22. 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
for first Rs. 3,00,000 of book profits and at of the working partner
allowable
60 percent of remaining book profits which be changed at the rate
expenses in is not justified. of Rs. 1,80,000 per
the form of 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.
(SUGGESTION FOR
RATIONALIZATION
OF THE PROVISIONS
OF DIRECT TAX
LAWS)
23. Explanation 5 Section 43 deals with actual cost. There In line with the other
to Section are 14 explanations provided in 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 by different 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.
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
24. 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.
25. Benefit of Section 44AD relating to presumptive The benefit of section
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
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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.
26. 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
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
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 31
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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)
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PART E-CAPITAL GAINS
Sr. No Section Issue/Justification Suggestion
27. Limited Clause (viab) is inserted in New clauses may be inserted
Liability section 47 so as to provide in section 47 to provide for:
Partnership exemption in respect of any (i) Consequent exemption in
(LLP) - transfer in a scheme of respect of transfer of shares
(a) Section 47 amalgamation, of a capital asset, by the resident shareholders
Insertion of being a share of a foreign of the amalgamating foreign
clause (viab) company, which derives, directly company if transfer is made in
to provide or indirectly, its value consideration of the allotment
exemption in substantially from the share or to him of any shares or shares
respect of shares of an Indian company, in the amalgamated foreign
transfer of held by the amalgamating company.
capital asset foreign company to the
(ii) exemption in respect of
consequent to amalgamated foreign company.
transfer in a scheme of
amalgamation However, no clause has been business re-organisation of a
of foreign inserted to provide consequent capital asset, being a share of
companies - exemption in respect of transfer a foreign company, which
Consequent of shares by the resident derives, directly or indirectly,
exemption to shareholders of amalgamating its value substantially from the
be provided in foreign company in share or shares of an Indian
respect of consideration of allotment of company.
transfer of shares of amalgamated foreign
(SUGGESTION FOR
shares by company. This appears to be an
RATIONALIZATION OF THE
resident inadvertent omission, since in
PROVISIONS OF DIRECT
shareholders case of exemption under section
TAX LAWS)
47(vi) in respect of transfer of
capital asset in a scheme of
amalgamation by an
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.
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 33
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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.
(b) 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 preceding 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
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)
(c) 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.
Page 34 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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Sr. No Section Issue/Justification Suggestion
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
case where the company was 3. Another alternative that
possessed of total assets worth could be considered is that on
Rs. 5 crores in any of the 3 conversion, the assessee pays
years. tax @ 15% subject to
compliance of only sub-
clauses (a), (b) and (c).
The expression "value of total
(SUGGESTION FOR
assets appearing in the books of
RATIONALIZATION OF THE
accounts" is not defined and may
PROVISIONS OF DIRECT
create certain interpretational
TAX LAWS)
issues such as whether status of
assets is to be seen on balance
sheet date or even one day's
presence during the year will be
considered if asset no longer
exists with the assessee as on
balance sheet date. Also,
whether `Miscellaneous Expense'
as an item reflected on balance
sheet will constitute an asset,
treatment of advance tax paid
shown on asset side (with
corresponding provisions for tax
on liability side), etc. are the
other issues which need to be
addressed.
28. 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
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.
taken as the relevant part of cost
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 35
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
and other of FCEB. There is no (SUGGESTION FOR
Bonds & corresponding provision for taking RATIONALIZATION OF THE
Debentures holding period of the shares from PROVISIONS OF DIRECT
the day of acquisition of the Bonds TAX LAWS)
[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).
29. 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 1. In many cases, assessee is not bonds may be allowed upto
bonds aware about exemption provision the due date of filing of ITR.
and comes to know about it only
when he approaches his/her tax (SUGGESTION FOR
consultant at the time of filling of RATIONALIZATION OF THE
ITR. By this time, 6 months period PROVISIONS OF DIRECT
is already over and thus the
TAX LAWS)
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
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
Page 36 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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Sr. No Section Issue/Justification Suggestion
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
financial year does not exceed fifty economy, it is further
lakh rupees. suggested that the said limit of
Rs.50 Lakhs may be raised to
The change is proposed to plug Rs. 1 crore.
the revenue leakage and to clarify
the real intent of the law. Since, (SUGGESTION FOR
the new proviso is in furtherance RATIONALIZATION OF THE
of the existing proviso; it may PROVISIONS OF DIRECT
cause hardship in genuine cases TAX LAWS)
where investment has to be made
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 37
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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.
30. Section Background: It is suggested to bring
55(2)(ac) clarity in determining the
The Finance Act, 2018 has
Clarification introduced section 55(2)(ac) cost of acquisition in case of
required to which states that cost of merger/demerger etc. u/s
determine the acquisition in relation to a long 55(2)(ac) by amending the
cost of term capital asset, being an said section or by issue of a
acquisition in equity share in a company or a clarification.
case of unit of an equity oriented fund or (SUGGESTIONS TO REDUCE /
Merger/Demer a unit of business trust for the MINIMIZE LITIGATIONS)
ger etc. purpose of calculating tax
payable u/s 112A shall be as
under:
Cost of acquisition for the assets
acquired before 1st February
2018, shall be higher of the
following:
(i) The actual cost of acquisition
of such asset, and
(ii) The lower of:
(a) the fair market value of such
assets as on 31st January 2018;
and
(b) the full value of consideration
received or accruing as a result
of the transfer of the capital
Page 38 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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Sr. No Section Issue/Justification Suggestion
asset.
Fair market value should be
calculated in following manner
Fair market value for capital
assets listed on recognized stock
exchange as on 31st January
2018 shall be
(i) Fair market value shall
be the highest price of the capital
asset quoted on any stock
exchange in India on 31st
January 2018.
(ii) Fair market value in case if
there is no trading of the capital
asset on 31st January 2018 will
be highest price of the capital
asset quoted on date
immediately preceding 31st
January 2018 when the asset
was last traded.
(iii) Fair market value of a
capital assets being a unit which
is not listed on a recognized
stock exchange as on 31st
January 2018 shall be net asset
value of the capital asset as on
31st January 2018.
(iv) Fair market value in
other case shall be
In case of equity share which are
not listed on the stock exchange
as on 31st January, 2018,
however, the same has been
listed on stock exchange on the
date of transfer Fair market
value in such case shall be an
amount which bears to the cost
of acquisition the same
proportion as cost inflation index
for the F.Y. 2017-18 bears to the
cost inflation index for the first
year in which the asset was held
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 39
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
or for the year beginning on 1st
April, 2001, whichever is later.
This aforesaid provision requires
clarification in computation of
cost of acquisition when there is
a merger/ demerger etc.
Issues:
(i) Merger: A shareholder
Mr A has purchased 10 shares of
X Ltd (listed co.) on 01st
January 2017 at Rs. 100 each.
Later, on 1st June 2018 X Ltd
merges with Y Ltd (listed co.) and
Mr A gets the shares of Y Ltd
against his investment in X Ltd.
Mr. A further sells the shares of Y
Ltd on 31st July 2019.
This section is applicable only
when the capital asset is
acquired before 01st February
2018. Since the holding period of
X Ltd is added for determining
LTCG/STCG, Shares of Y Ltd
should be deemed to be acquired
before 01st February 2018 and
the fair value of shares of X Ltd
on 31st January 2018 should be
considered for the purpose of
determining the cost of
acquisition of shares of Y Ltd u/s
55(2)(ac).
Now the question arises how to
determine the fair value as on
31st January 2018 - When both
the companies are listed. To
determine the fair value of equity
share, we may refer to the
highest price of shares of X Ltd
or Y Ltd as on 31st January
2018. There is no clarity in
section 55(2)(ac) and therefore, it
Page 40 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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Sr. No Section Issue/Justification Suggestion
needs to be amended to provide
that fair value of shares of X Ltd
on 31st January 2018 be treated
as cost of acquisition of shares of
Y Ltd.
(ii) Demerger: A
shareholder Mr. A has purchased
10 shares of X Ltd on 01st
January 2017 at Rs. 100 each.
Later, on 1st June 2018 Retail
division of X Ltd demerges from
X Ltd and is transferred to Y Ltd.
Mr. A continues to hold the
shares of X Ltd and he also gets
the shares of Y Ltd in the ratio of
no of shares held by him in X Ltd
. Mr. A further sells the shares of
X Ltd and Y Ltd on 31st July
2019.
In order to determine the Gain/
Loss on sale of shares, we would
be required to compute the cost
of acquisition of shares under
section 55(2)(ac). These
provisions does not provide
clarity of valuation on shares on
demerger. Section 55(2)(ac) may
need to be amended by clarifying
that on demerger the share price
of X Ltd (Listed co) is to be
determined as on 31st January
2018 by taking highest price as
on 31st January 2018. The said
price shall be further divided in
the ratio of networth in X Ltd after
demerger and the networth
transferred to Y Ltd.
Eg. In case the highest price of
shares of X Ltd as on 31st
January 2018 is 120. And in case
20% of the net-worth is
transferred to Y ltd. Then 120 x
80% = 96 shall be cost of
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
acquisition as per section
55(2)(ac) for shares of X Ltd and
120 minus 96 = 24 shall be the
cost of acquisition of share price
of Y Ltd as on 31st January
2018.
31. 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
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.
Page 42 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
PART F-INCOME FROM OTHER SOURCES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
32. 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)
33. Section As per the Section 56(2)(x), if any person A suitable clarification may
56(2)(x) receives any property on or after 1 April 2017, be issued that section
Clarification without consideration or for consideration which 56(2)(x) is applicable only for
w.r.t. issue of is less than the aggregate fair market value by transfer of shares and not
shares an amount exceeding Rs 50,000, the difference for issue of shares.
shall be taxable under the head `Income from
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 43
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
Other Sources' in the hands of the recipient. (SUGGESTION FOR
The intent of legislation is to bring within ambit RATIONALIZATION OF THE
of taxation instances of `transfer' for inadequate PROVISIONS OF DIRECT
consideration and not `issue' of shares. TAX LAWS)
This section has replaced the erstwhile section
56(2)(viia) which was applicable only for
transfer of shares as was mentioned in
Explanatory Memorandum to Finance Bill,
2010.
34. 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. 4th Proviso to section 56(2)(x) provides the 47
conversion cases to which this clause would not apply. · (xiii)
Sub-clause (IX) to 4 th Proviso to section · (xiiib)
56(2)(x) provides certain transactions not · (xiv)
regarded as transfer to which this section would (SUGGESTION FOR
not be applicable. RATIONALIZATION OF THE
Certain transactions, seems to be missed out PROVISIONS OF DIRECT
even though covered u/s 47 specially related to TAX LAWS)
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
Page 44 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
CHAPTER VI
AGGREGATION OF INCOME AND SET OFF OR
CARRY FORWARD OF LOSS
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 45
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
35. Section 71(3A) - Section 71 of the Act provides for set off of It is therefore suggested to
Loss from any loss arising under the head "Income withdraw the said
House Property from House Property" against any other amendment. Alternatively,
head of income. As per section 71, it is the limit of Rs 2 lakhs may be
restricted to set off the losses to the extent raised to atleast Rs 5 lakhs.
of Rs 2,00,000 against any other head of (SUGGESTION FOR
income and the unabsorbed loss to be RATIONALIZATION OF THE
carried forward upto subsequent 8 PROVISIONS OF DIRECT TAX
assessment years. LAWS)
Middle class and lower class people
generally invest in property by obtaining
loan from the banks. The amount of
interest paid is always higher than the
rental income earned against such
property and as per the current provisions
the loss could be set off against other
income. This has always been a motivator
to invest in the real estate.
The amendment will hit the salaried class
badly since many salaried class have real
estate as one of the dominant asset class
in the portfolio. Many of them have
borrowed to acquire a house which is self-
occupied.
Further, the Finance Minister in his budget
speech focused on housing development.
The restriction of set off of loss will not
promote development of housing projects.
The carry forward of the unabsorbed loss
under Income from house Property is
allowed for a period of 8 assessment
years. However, practically there would
not be any positive income since the
interest cost is very high.
36. 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 Service industry undertakings in general RATIONALIZATION OF THE
Page 46 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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Sr. Section Issue/Justification Suggestion
No
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.
37. 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
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.
38. 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
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 47
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
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. Similar position remains even after
the substitution of section 79 vide the
Also, the period for carry
Finance (No. 2) Act, 2019.
forward and set-off of losses
The existing provisions provide for can be extended based on
restrictions on carry forward of losses in period of gestation in the
case of substantial change in shareholding particular industry instead of
of the Indian company. As per the current initial period of 7 years.
provisions, shareholders of the company at
(SUGGESTION FOR
the end of the financial year in which the
RATIONALIZATION OF
loss was incurred must continue to own at
THE PROVISIONS OF
least 51% of the shares in that company in
DIRECT TAX LAWS)
the year in which such carry forward loss
is to be set off; otherwise, the company
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
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
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Sr. Section Issue/Justification Suggestion
No
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 section
third proviso in restricts the carry forward and set off of 79(2)(c) be amended to
Section 79 - losses in the hands of a closely held clarify that it applies both to
relief for change company, if the shares carrying more than the company undergoing
in shareholding 51% of voting power of such company are resolution process as well as
of subsidiaries not beneficially held by persons who its subsidiaries. The
pursuant to beneficially held such shares on the last provision may be modified as
resolution plan day of the previous year in which such loss follows:
was incurred.
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
In addition, thereto, the company may also plan approved under the
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Sr. Section Issue/Justification Suggestion
No
be required to hive off its investments in Insolvency and Bankruptcy
subsidiaries by selling its stake to Code, 2016, after affording a
interested investors. This may result in reasonable opportunity of
change in shareholding of the subsidiaries being heard to the
triggering consequences u/s 79 of the jurisdictional Principal
Income-tax Act, 1961 in the hands of Commissioner or
subsidiaries as well. Hence, this may Commissioner holding
discourage the interested jurisdiction over the
acquirers/bidders from making investments applicant".
in loss making subsidiaries and also in (SUGGESTION FOR
offering higher bids. RATIONALIZATION OF
Finance Act 2018 has amended the THE PROVISIONS OF
provisions of section 79 by inserting third DIRECT TAX LAWS)
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. Similar position remains
even after the substitution of section 79
vide the Finance (No. 2) Act, 2019.
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
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
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raise a doubt that the third proviso to
section 79 only refers to the company
which is undergoing a resolution process
under IBC.
39. Section 79 - In a recent decision, the Karnataka High It is suggested that it be
Carry forward Court (in the case of AMCO Power clarified that whether section
and set-off of Systems Ltd.) held that the term beneficial 79 would apply only to a
losses in certain shareholding as used in section 79 would change of more than 51% in
cases apply to the ultimate holding company as the immediate holding
well, and not be restricted to the company, or whether it would
immediate shareholding. also apply in the case of a
change in the ultimate
holding company.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
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CHAPTER VIA
DEDUCTIONS TO BE MADE IN COMPUTING TOTAL
INCOME
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PART B-
DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
40. Section 80-IBA Under section 80-IBA, inserted by It is suggested that a monitoring
Need to prescribe the Finance Act, 2016 from mechanism i.e. a form may be
a form/certificate 1.4.2017, deduction of 100% of prescribed under section 80-IBA
profits derived from development of to be certified by an Accountant
affordable housing projects so that assessees claiming
approved on or after 1st June 2016 deduction under this section may
is available, subject to fulfillment of be checked for correctness of
specified conditions. It prescribes claims made as well as fulfilment
multiple conditions to be fulfilled by of conditions prescribed i.e form
assessee in order to claim to be prescribed to be
deduction under this section. incorporated in the section itself.
However, no monitoring (SUGGESTION FOR REMOVAL
mechanism has been prescribed to OF ADMINISTRATIVE AND
determine the correctness of claims PROCEDURAL DIFFICULTIES
made by the concerned assessees. RELATING TO DIRECT TAXES)
This may ultimately lead to leakage
of revenue.
41. Section 80C PPF is used as a means of savings It is suggested that:
Various by entrepreneurs and a) the annual limit for contribution
suggestions professionals. While the assessees to PPF be increased to Rs. 3 lakhs
in employment have the from the present ceiling of Rs. 1.5
compulsion of saving 12% of their lakhs.
salary (with matching contribution
b) the maximum limit for
from employers), the only safe and
deduction under section 80CCF
tax efficient saving option available
may be increased from Rs.1.5
for self-employed assessees is
lakhs to Rs.3 lakhs.
PPF. Hence, the suggestion to
increase the ceiling of PPF c) full deduction for health
contribution to Rs.3 lakhs. This insurance premium paid u/s.80D
may also boost the domestic may be allowed and not to tag it
savings as a percentage of GDP with deduction for medical
and will have an anti-inflationary expense. Apart from deduction for
impact. health insurance premium, a
separate deduction for medical
Further, the present limit of INR.
expenses incurred should be
1,50,000 has not been increased
made available. The justification
for several years and requires
for such separate deduction is
reconsideration. The revised
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monetary limit will help in lack of social security cover and
increasing the savings of the inability of public health
individuals and is necessary sector to cater to the needs of the
keeping in view the rate of inflation. 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 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.
(e) The quantum of deduction
under section 80C be increased
from Rs 1,50,000 to Rs 2,50,000 to
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Sr. Section Issue/Justification Suggestion
No
provide savings opportunities to
public at large.
(SUGGESTION FOR REMOVAL
OF ADMINISTRATIVE AND
PROCEDURAL DIFFICULTIES
RELATING TO DIRECT TAXES)
42. Section 80EEA - In order to promote affordable (i) Considering the fact that no
Tax incentive for housing, the Finance (No. 2) Act, additional deduction was
affordable housing 2019 has introduced a new section available for loans sanctioned
80EEA so as to provide an during the period 01.04.2017 to
additional deduction of up to Rs 31.03.2019 taken by eligible
1,50,000/- for interest paid on loans assessees for purchasing
borrowed up to 31.03.2020 for residential house property and
purchase of an affordable house satisfying conditions as
valued up to Rs 45 lakh. mentioned in section 80EE/80EEA,
it is suggested to make the
following change in section
Issue I:
80EEA(3)(i):
Request to provide benefit to
" (i) the loan has been sanctioned
assessees whose loan were
by the financial institution during
sanctioned after section 80EE
the period beginning on the 1st
deduction was not available i.e.
day of April, 20192017 and ending
01.04.2017 and onwards
on the 31st day of March, 2020;"
One of the conditions required to
(ii) Accordingly, it is suggested
avail the benefit of section 80EEA
that section 80EEA(1) may be
is that the loan has been
amended as follows (by inserting
sanctioned by a financial institution
the words `or construction' akin
during the period beginning on
to provisions of section 54 and
01.04.2019 to 31.03.2020. Further,
54F):
benefit of section 80EEA is
available to assessee, being an "(1) In computing the total income
individual not eligible to claim of an assessee, being an
deduction under section 80EE. individual not eligible to claim
Here, it is pertinent to mention that deduction under section 80EE,
benefit of section 80EE was there shall be deducted, in
available to assessees whose loan accordance with and subject to
had been sanctioned by the the provisions of this section,
financial institution during the interest payable on loan taken by
period beginning on 01.04.2016 him from any financial institution
and ending on 31.03.2017. for the purpose of acquisition OR
Accordingly, there are hundreds of CONSTRUCTION of a residential
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Sr. Section Issue/Justification Suggestion
No
assessees who may have loan house property."
sanctioned after 01.04.2017 but
before 31.03.2019 for purchasing a
residential house property and
fulfilling other conditions as laid
down in section 80EE/ section
80EEA. Such assessees did not get
any income tax benefit in the
absence of such a provision in
income tax law during such period.
In order to truly realize the goal of
the current Government of `Housing
for All' and `affordable housing', it
may be considered that the
provision of section 80EEA
pertaining to period of sanctioning
of loan may be taken from
01.04.2017 instead of 01.04.2019
i.e. the period when deduction
under section 80EE was not
available.
Issue II:
Clarity regarding benefit to be
available for loan taken for
construction of residential house
property as well
Section 80EEA(1) reads as under:
"(1) In computing the total income
of an assessee, being an individual
not eligible to claim deduction
under section 80EE, there shall be
deducted, in accordance with and
subject to the provisions of this
section, interest payable on loan
taken by him from any financial
institution for the purpose of
acquisition of a residential house
property." [Emphasis supplied]
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Sr. Section Issue/Justification Suggestion
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In this regard, Memorandum
explaining the Finance Bill provides
as follows:
"In order to provide an impetus to
the `Housing for all' objective of the
Government and to enable the
home buyer to have low-cost funds
at his disposal, it is proposed to
insert a new section 80EEA in the (iii) In view of aforesaid, it is
Act so as to provide a deduction in suggested that limit of Rs 45 lakh
respect of interest up to one lakh as the value of residential house
fifty thousand rupees on loan property may be raised
taken for residential house appropriately. (say to Rs 55
property from any financial lakhs). Further, akin to section
institution subject to the following 80EE, section 80EEA(3)(ii) may be
conditions:" [Emphasis supplied] amended to do away with the term
As can be seen from above, `stamp duty value'. In other
Section 80EEA(1) uses the words, the following change may
wordings "acquisition of a be made in section 80EEA(3)(ii):
residential house property"
whereas in the Memorandum
"(ii) the stamp duty value of
explaining the Finance Bill, the term
residential house property does
used is "loan taken for residential
not exceed forty-five fifty-five lakh
house property". In the larger
rupees;"
interest of small tax payers, the
wordings in the section 80EEA(1)
may be modified from "acquisition
of a residential house property" to
"acquisition or construction of
residential property". There may be
a case where assessee owns a
land and desires to construct a
house and loan is taken for
construction of that house. In the
absence of clarity, there may be
litigations/issues on plain
interpretation of language used in
the section 80EEA(1) w.r.t.
availability of benefit on interest
payable on loan taken for
construction of residential house
property. It is pertinent to mention
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Sr. Section Issue/Justification Suggestion
No
here that section 54 and 54F quite
clearly uses the term `construction'
along with the term `purchase' of a
residential house property.
Issue III:
Request to raise the value of
residential house property from
Rs 45 lakhs to a reasonable
amount so that additional
deduction of Rs 1.5 lakh may be
claimed
In order to avail the benefit of this
section, one of the conditions
prescribed is that the stamp duty
value of residential house property
does not exceed Rs 45 lakhs. Let's
take a case where the actual cost
of acquisition of residential house
property on which loan is taken
from Financial Institution (FI) is
Rs.40.00 lakh. Normally, FI
finances 75% to 80% of cost of
property. In the given case, the
loan amount would be say approx.
Rs.30.00 lakh. As per the prevailing
rate of interest on housing finance
(presuming it to be under 9%),
interest even in the first year would
not be more than Rs. 3.00 lakh. If
assessee consumes interest of Rs.
2.00 lakh under section 24(b), the
maximum limit/benefit in the section
remains unutilized.
Under such circumstances, in order
to pass on the real benefit of Rs.
1.50 lakh additional deduction, the
limit of Rs.45.00 lakh may
reasonably be modified.
It may be noted that even
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Sr. Section Issue/Justification Suggestion
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otherwise, limit of allowable interest
u/s section 80EE (though
applicable for loan sanctioned
during the financial year 2016-17) is
increased from Rs. 50,000/- to Rs.
1,50,000/-, corresponding limit of
value of residential property is
reduced from Rs. 50 lakh to Rs.45
lakh which seems to be
unjustifiable.
Further, instead of stamp duty
value as used in section
80EEA(3)(ii), it should be actual
acquisition cost or cost of
construction as stamp duty value in
many circumstances is much more
than actual value. To quote an
example, if the layout is on main
road and it has few flats on main
road and some are on fifth or sixth
lane. The stamp duty valuation of
entire layout is same whereas
actual valuation may differ because
of so many circumstances such as
house is having two roads; it is near
garden of society, floor location etc.
Also, section 80EE refers to the
`value of residential house property'
and not `stamp duty value'.
Issue IV: (iv) It is suggested that section
Condition of not owning any 80EEA(3)(iii) may be appropriately
residential house not in line with amended so as to make it in line
the provisions of section 54 and with the provisions of section 23
23 and 54 i.e following change may
be made:
One of the conditions to avail
benefit of section 80EEA is that the "(iii) the assessee does not own
assessee does not own any any more than one residential
residential house property on the house property on the date of
date of sanction of loan. It implies sanction of loan."
that house property for which loan (SUGGESTION FOR REMOVAL
OF ADMINISTRATIVE AND
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
is taken should be the first house PROCEDURAL DIFFICULTIES
property of the assessee. This RELATING TO DIRECT TAXES)
condition is contrary to the
provisions of section 54 and 23 of
the Income-tax Act, 1961 which
allows the beneficial provisions
specified therein to assessees
owning two house properties. In the
Interim Budget presented on
01.02.2019, the Finance Act 2019
amended section 23 so that the
assessee can claim two house
properties as self-occupied for the
purpose of calculating the annual
value u/s 23(2) under the head
`Income from house property'.
Even under the head `income from
capital gains', the assessee can opt
for 2 residential houses of upto Rs
2 crores for reinvestment purposes
(u/s 54) while calculating taxable
capital gains.
Accordingly, the aforesaid condition
attached to the section 80EEA
makes the assessee ineligible to
claim the interest under this section
if he owns any other house on the
date of sanction of the loan.
43. Section 80EEB- With a view to improve environment It is suggested that section 80EEB
Tax incentive for and to reduce vehicular pollution, may be suitably amended so as to
electric the Finance (No. 2) Act, 2019 has incorporate the condition of not
vehicles/Deduction inserted a new section 80EEB so owning any other electric vehicle
in respect of as to provide an additional income at the time of sanction of loan as
purchase of tax deduction of Rs 1.5 lakh on the envisaged in the Explanatory
electric vehicle interest paid on loans taken to Memorandum.
purchase electric vehicles. (SUGGESTION FOR REMOVAL
OF ADMINISTRATIVE AND
Issue: PROCEDURAL DIFFICULTIES
As per Explanatory Memorandum, RELATING TO DIRECT TAXES)
in order to avail the benefit of the
deduction, one of the conditions
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Sr. Section Issue/Justification Suggestion
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specified is that the assessee does
not own any other electric vehicle
on the date of sanction of loan.
However, this condition is not there
in the section 80EEB of Finance
(No. 2) Act 2019. This condition is
in line with a similar condition of not
owning any other house property
on the date of sanction of loan as
per section 80EEA.
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PART C-
DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
44. Section 80PA The Finance Act 2018 inserted a new section 80PA It is suggested to
Applicability to incentivize Farm Producer companies on lines amend section
of MAT similar to existing section 80P. The provision 80PA/115JB
provides for 100% deduction in respect of Farm appropriately such
Producer companies having total turnover upto Rs that MAT is not
100 crore whose gross total income includes the applicable to
incomes specified therein. Farmers Producer
As aforesaid, on similar lines as of Co-operative companies.
Society, the Hon'ble Finance Minister of India had
introduced section 80PA for Farmers Producer In case MAT is
Companies vide the Union Budget, 2018 (100% made applicable to
deduction for 5 years). Farmers Producer
But there is no respective amendment in section Companies, then
115JB (pertaining to Minimum Alternate Tax). There there will still be a
is a case for an an amendment in section 115JB also tax burden of 15%
to fully exempt Farmers Producer Companies from on producer
taxation. companies.
The Hon'ble Finance Minister has said in his budgetAppropriate
speech that government is giving deduction to amendment may be
Farmers Producer Companies on similar lines as of made in Section
Co-operative Societies. 115JB to free the
Farmers Farmer's
Producer
Relevant extracts of the speech-
Companies from tax
bracket.
"47. Madam Speaker, at present, hundred per cent (SUGGESTIONS
deduction is allowed in respect of profit of co- FOR
operative societies which provide assistance to its RATIONALIZATION
members engaged in primary agricultural activities. OF THE
Over the last few years, a number of Farmer PROVISIONS OF
Producer Companies have been set up along the DIRECT TAX LAWS)
lines of co-operative societies which also provide
similar assistance to their members. In order to
encourage professionalism in post-harvest value
addition in agriculture, I propose to allow hundred
per cent deduction to these companies registered as
Farmer Producer Companies and having annual
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Sr. Section Issue/Justification Suggestion
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turnover up to `100 crores in respect of their profit
derived from such activities for a period of five years
from financial year 2018-19. This measure will
encourage "Operation Greens" mission announced
by me earlier and it will give a boost to Sampada
Yojana."
Co-operative Society Taxation
Section 115JC (pertaining to Alternate Minimum Tax)
is applicable to Co-operative Societies. But, due to
specific reference in Section 115JC, the Co-
operative Societies which take deduction of Section
80P, can also reduce book profits by the amount of
deduction claimed under Section 80P.
It may be noted that while cooperative assesses are
not exposed to tax based on book profit like
companies, they are to pay a minimum tax based on
adjusted total income which shall be computed by
increasing the deductions as claimed by assessee
under any section included in Chapter VI-A of the
heading `C Deductions in respect of certain
incomes' (but excluding any deduction u/s 80P) and
deduction claimed u/s 10AA, with the total income as
assessed by AO. In other words, the cooperatives,
which are only entitled to deduction u/s 80P, shall
not be affected by the AMT provisions.
45. 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.
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Sr. Section Issue/Justification Suggestion
No
46. 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 interest on National
respect of interest income on deposits made by
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
business of banking (including a co-operative land are also able to
interest on 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 (SUGGESTION
allowed.
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)
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.
47. 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 Disabilitie s Act, with Disabilities
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28.12.2016 2016'. Accordingly, section 80U needs amendment in (Equal
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)
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CHAPTER X
SPECIAL PROVISIONS RELATING TO AVOIDANCE
OF TAX
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
48. Domestic Section 80-IA(8) deals with In view of aforesaid,
Transfer Pricing "ordinary profits" whereas transfer appropriate amendment
[DTP] Sections pricing compliance refers to the may be made.
92, 92BA, 92C, "Arm`s Length Price" of the (SUGGESTION FOR
92CA, 92D & 92E transactions. RATIONALIZATION OF
Conceptually, `price principles' THE PROVISIONS OF
a) Arm's Length
cannot apply for benchmarking of DIRECT TAX LAWS)
Price vs Ordinary
Profits `profits'.
b) Advance Currently, APA provisions are The same should also be
Pricing being made applicable to only made applicable to
Agreements international transactions. domestic transactions
covered by DTP
provisions.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
c) Documentation Where the volume of specified It is suggested that the
Requirements domestic transactions is below the maintenance of
threshold limit, the maintenance of documentation as
documentation as required for required for transfer
transfer pricing should not be pricing should not be
applicable. applicable. Alternatively,
a threshold limit of Rs.
25 crores be introduced
for TP documentation
requirements.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 67
The Institute of Chartered Accountants of India
CHAPTER XII-
DETERMINATION OF TAX IN SPECIAL CASES
Page 68 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
49. Section Currently, the benefit of reduced tax rate is It is suggested that section
115BAB(2)(b) - given to companies engaged solely in the 115BAB(2)(b) may be
scope may be business of manufacturing. amended so as to enlarge
enlarged Manufacturing companies may be allowed to the activities undertaken by
undertake certain trading or job work manufacturing companies
activities, in addition to their normal under it (eg ancillary
manufacturing activities as this will help to trading/job work).
increase their revenue in the initial stages of (SUGGESTION FOR
operation. RATIONALIZATION OF
This is line with the normal practices followed THE PROVISIONS OF
by manufacturers who even undertake job- DIRECT TAX LAWS)
work as ancillary activity.
50. 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, Alternatively, the earlier
individuals, HUFs system of taxation of
- thirdly as tax on dividends.
and firms dividend, prior to 1997,
receiving - Fourth by disallowing expenses on dividend namely, tax in the hands of
dividend in u/s. 14A. the shareholder can be re-
excess of Rs.10 The economic tax ultimately borne by resident introduced and levy of
lakh to be subject shareholders may be as high as 54%. Dividend Distribution Tax in
to tax @ 10% in the hands of the company
their hands may be removed.
Consequence of
the new levy-
(SUGGESTION FOR
Triple taxation
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.
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
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)
51. Section 115BBF India introduced its patent box regime vide Following suggestions are
Rationalizing Finance Act 2016 with effect from 01 April intended to rationalise
patent tax regime 2017. Under the regime, royalty income in existing Patent tax regime:
respect of a patent developed and registered (i) It may be clarified
in India shall be taxable at a flat rate of 10%. that benefit of regime may
The existing patent box regime suffers from be obtained where a patent
the following issues: is applied for, but
registration has not yet been
(i) The patents to be `registered' in granted under the Patent
India - It is unclear as to whether law.
a patent which has been applied (ii) It is suggested that
for, but for which registration has the Patent Box regime
not been granted will qualify should be extended to other
under this regime. forms of IPRs, like industrial
(ii) Coverage of regime has been design, copyrights,
restricted to Patents - Patent Box trademarks, etc. so as to
regime is not available to other promote IPR registration in
IPRs, like industrial design, India.
copyrights, trademarks, etc. (iii) It may be clarified
(iii) No guidelines on outsourcing of that benefit of the regime
IP development - There are no shall be available, subject to
guidelines on outsourcing of R&D a reasonable threshold, in
functions. Thus, limited cases where IP development
outsourcing may also raise an is outsourced.
issue on availability of benefit (iv) It is suggested that
under patent box regime. the existing regime may be
(iv) Initial patent developed by liberalised to grant benefit to
individual - The benefit is a person who acquires
available to the true and first patent from the `true and
inventor of the invention. Thus, first inventor' and further
where a company acquires a makes is commercially
patent developed by an individual useable.
and invests to develop it further to (SUGGESTION TO CHECK
make it marketable, it may not be TAX AVOIDANCE)
eligible for the benefit.
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Sr. Section Issue/Justification Suggestion
No
The suggestion would strengthen the existing
Patent Box regime. Further, the suggestion is
intended to encourage R&D in India, stimulate
growth and reduce litigation.
52. 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
@ effective rate of 79%. thereon be reduced as per
high rate of tax
applicable total income
In the current scenario, the rate is very high / levels/slab rates.
harsh and needs to be reconsidered. It is not (SUGGESTION TO CHECK
required now to tax at such high rate. TAX AVOIDANCE)
53. 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 transfer
credits to be is a welcome move. This would go a long way of carbon credits in the
taxed @ 10% - in helping to resolve the uncertainty and definition of "income".
Inclusion in litigation over the taxability of income from the
definition of transfer of carbon credits going forward.
The option to pay tax on
income under Consequent amendment is required in the such receipts at 10% could
section 2(24) and definition of the term `income' under Section be structured as a one-time
clarification 2(24) of the Income-tax Act to include the scheme open for a limited
regarding tax income from transfer of carbon credits. time.
treatment for Further, the position regarding taxability of (SUGGESTION FOR
prior assessment income from transfer of carbon credits for RATIONALIZATION OF
years earlier years may be clarified since there have THE PROVISIONS OF
been divergent decisions given by the courts DIRECT TAX LAWS)
on whether such receipts are capital or
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
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 71
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
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 72 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
CHAPTER XII-B
SPECIAL PROVISIONS RELATING TO CERTAIN
COMPANIES
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 73
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
54. Section The newly legislated Insolvency and Bankruptcy It is suggested that
115JB - code, 2016 (IBC) is a comprehensive legislation in suitable clarification may
Insertion of India dealing with insolvency and bankruptcy of be inserted in Section
clause (iih) Corporates. The Code consolidates all the other 115JB to clarify that the
in laws in India dealing with insolvency. Pursuant to brought forward losses
Explanation enactment of IBC, the Sick Industrial Companies and unabsorbed
1 to section Act (SICA) has been repealed and provisions are depreciation for this
115JB - made to enable sick companies undergoing purpose should be
Downward resolution through BIFR to approach National considered as per books
adjustment Company Law Tribunal (NCLT). IBC provides for of account. It may be
of implementation of resolution plan which is provided that the
aggregate intended to revive distressed companies in a time aggregate of the brought
brought bound manner under the creditor in command forward losses and
forward process. unabsorbed depreciation
losses and Stakeholders have been facing enormous as at the end of the year
depreciation bottlenecks due to lack of clarity on tax issues. preceding the year in
u/s 115JB Unfortunately, there is no provision in IBC or which application is
Income-tax Act which provides for an overriding admitted may be allowed
impact of resolution plan sanctioned by NCLT. to be reduced from book
profits.
The Finance Act, 2018 has provided that while
computing book profits u/s 115JB of the Income-
tax Act, a deduction will be allowed for aggregate (SUGGESTION FOR
of book profits and unabsorbed depreciation in RATIONALIZATION OF
case of companies in respect of which an THE PROVISIONS OF
application for initiating resolution process has DIRECT TAX LAWS)
been accepted by the adjudicating authority.
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 language as is
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
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.
55. Section It appears that Disallowance/Adding back of Clause (b) and (i) of
115JB - provision for diminution in value of any asset for Explanation 1 to section
Minimum computation of "book profit" is to be made in case 115JB may be amended
Alternate tax 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 may to any reserves, by
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 bad 33AC and a reserve
debts is allowed under express provision created and allowed in
contained in section 36(1)(viia) subject to the limit accordance with the
specified in the said section. If provision for bad provisions of section
debts is allowed as deduction in computation of 36(1)(viii)]
business income under normal provision, there
....
does not appear to be any cogent reason for
disallowing the same in computation of "book (i) the amount or
profit" under section 115JB. Similarly, any special amounts set aside as
reserve created in accordance with the provisions provision for diminution
of section 36(1)(viii) also does not require any in the value of any asset
disallowance in computation of book profit under (other than provision for
section 115JB. bad and doubtful debts
allowed as a deduction
under section
36(1)(viia))"
(SUGGESTIONS TO
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 75
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
REDUCE/ MINIMIZE
LITIGATIONS)
56. Section Under Ind AS, prior period adjustments are not It is suggested that a
115JB 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 could aforesaid situation may
compliant be an issue if the return of income for such earlier be provided under
companies year has already been filed and due date of filing section 139(5) or prior
revised return has lapsed. period adjustments may
be allowed to be
adjusted from book
profit in the year in
which errors are
discovered.
(SUGGESTION TO
REDUCE / MINIMIZE
LITIGATIONS)
Page 76 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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CHAPTER XII-D
SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED PROFITS OF DOMESTIC COMPANIES
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 77
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
1.
57. 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
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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
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 79
The Institute of Chartered Accountants of India
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.
58. 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
Dividend 500 500
declared
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Sr. Section Issue/Justification Suggestion
No
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).
59. Section 115- W.e.f. 1 October, 2014 the rate of dividend Thus, in order to attract foreign
O - Dividend distribution tax is required to be grossed up investors to invest in domestic
Distribution before paying tax. Thus, the effective companies, it is suggested to drop the
Tax dividend distribution tax rate would increase provisions of DDT and replace it by TDS.
to 17.647% (plus surcharge and education Alternatively, the effective rate of DDT
Cess). This has increased the tax outflow in be reduced from approx. 20 % to
the hands of the companies declaring effective 15%. Simultaneously, there is a
dividends. case of reduction of alternate minimum
Even though the dividend income is exempt tax rate to be reduced to 15% effective
in the hands of shareholders upto Rs. 10 from 18.5% currently in line with
lakhs, it will mainly affect the large number
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 81
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
of small shareholders, whose income is amendment made to section 115JB.
below exemption limit or whose taxable (SUGGESTION FOR
income falls within the tax bracket of 10%. RATIONALIZATION OF THE
(i.e. less than Rs 5 lakhs) as they would PROVISIONS OF DIRECT TAX LAWS)
have paid tax on dividend received at a
lower rate.
It may be noted that overall taxation on
profits of Rs. 100 earned by a company is
43.75% as explained below
Tax by company on profits of Rs. 100 (@
25%) = Rs 25
Tax on dividend payout of Rs. 62.5 (approx.
20%) = Rs. 12.5
Tax by individual tax payers (@10%) = Rs
6.25
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The Institute of Chartered Accountants of India
CHAPTER XII-DA
SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED INCOME OF DOMESTIC COMPANY
FOR BUY-BACK OF SHARES
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 83
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
60. 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.
elaborate, the following illustration has been (SUGGESTION FOR
given: RATIONALIZATION OF
1. Amount invested by foreign investor in THE PROVISIONS OF
unlisted company = USD 1 million DIRECT TAX LAWS)
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
had invested in India are facing double concern
- firstly in the form of sharp depreciation in
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Sr. Section Issue/Justification Suggestion
No
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 2020 (Direct Taxes and International Taxation) Page 85
The Institute of Chartered Accountants of India
CHAPTER XII-EB
SPECIAL PROVISIONS RELATING TO TAX ON
ACCREDITED INCOME OF CERTAIN TRUSTS AND
INSTITUTIONS
Page 86 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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Sr. No Section Issue/Justification Suggestion
61. 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 2020 (Direct Taxes and International Taxation) Page 87
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
shall also be liable to pay the tax
on accreted income to the credit
of the Central Government within
fourteen days from, ----..."
a. Time limit is too short to pay
especially when institution is
required to dispose of its assets
to make payment.
b. It takes longer time to take
permission from Charity
commissioner appointed under
Maharashtra Public Trust Act,
1950.
c. Further when capital assets are
sold, proceeds would also be
subject to capital gains tax.
As per section 115TD(5),Tax
need to be paid within a period of
14 days.
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
62. Seventh proviso The Finance (No. 2) Act, 2019 amended section
to section 139(1) 139(1) by inserting a proviso so as to specify
Mandatory certain high value transactions wherein ITR filing
furnishing of is being made mandatory. One of the transactions
return of income specified is if during the previous year, assessee
- Deposit amount has deposited an amount or aggregate of the
exceeding one amounts exceeding one crore rupees in one or
crore rupees in more current account maintained with a banking
current account company or a co-operative bank.
may be made
applicable to all
Issue I: Scope to be enlarged
types of (i) It is suggested that scope of
accounts As all current accounts maintained with the banks clause (i) of seventh proviso to
are PAN based i.e. PAN is one of the mandatory section 139(1) pertaining to
KYC docs for opening a current account with a deposit exceeding Rs 1 crore
bank, so transactions in such current accounts may be extended to include:
can easily be tracked. There is a case to extend
the scope of aforesaid specified transaction from
deposit in a current account to all the accounts (a) all types of account
maintained with the bank i.e be it saving account maintained with specified
or any other account. This will better serve the authorities i.e saving account etc
intent of the government to make mandatory filing (along with current account), and
of ITRs involving high value transactions. Further,
the aforesaid high value transaction is limited to (b) deposits made in accounts
current account maintained with a banking maintained with a co-operative
company or a co-operative bank. It is better if the society engaged in carrying on
account maintained with a co-operative society the business of banking as well
engaged in carrying on the business of banking as a post office (apart from a
as well as a post office also gets covered here. banking company or a co-
This will also align with the provisions of section operative bank) within its ambit
194N. to align with provisions of
Issue II: The term `expenditure' may be section 194N.
replaced with term `payment'
Clause (ii) and (iii) of seventh proviso to section (ii) It is suggested that the term
139(1) reads as follows: `expenditure' as used in clause
"(ii) has incurred expenditure of an amount or (ii) and (iii) of seventh proviso to
aggregate of the amounts exceeding two lakh section 139(1) may be changed
rupees for himself or any other person for travel to the term `payment' so as to
to a foreign country; or better convey the intent of the
(iii) has incurred expenditure of an amount or amendment.
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aggregate of the amounts exceeding one lakh (SUGGESTION FOR
rupees towards consumption of electricity; or" RATIONALIZATION OF THE
[emphasis supplied] PROVISIONS OF DIRECT TAX
LAWS)
The term `expenditure' may not convey the
meaning intended for due to the following two
reasons:
(a) Incurring expenditure normally connote a
`business' expenditure and may not cover/ apply to
non-business expenditure although intention is
quite clear that expenditure of foreign travel and
electricity consumption may be for any purpose
including personal.
(b) Suppose, parents of assessee `X' has gone for
foreign air travel and payment thereof made by
`X'. Now the expen diture is being incurred by the
parents but is being paid by `X". The purpose is to
get ITR filed by `X' and not by his parents.
63. Explanation 2 to As per clause (a)(ii) of Explanation 2 to section It is suggested that section
section 139(1) 139(1), the due date to file ITR for a working 139(1) may be appropriately
Need to partner of a firm whose accounts are required to amended so that due date to file
synchronize due be audited under Income-tax Act or under any ITR for working partners of a
date of partner other law for the time being in force is 30th firm which is liable to furnish its
with that of Firm September of AY. However, as per clause (aa) of ITR by 30th November of the AY
liable for Explanation 2 to section 139(1), the due date to (due to application of section
domestic file ITR in the case of an assessee who is 92E r.w.s. 92BA) be
transfer pricing required to furnish a report referred to in section synchronised with the existing
provisions 92E is 30th November of AY. due date of 30th September of
Difficulty is being faced by working partners of the AY applicable for working
Firm which are liable to file its ITR by 30th partners of such firms. It may
November of the AY due to application of kept in mind that non-working
domestic transfer pricing provisions under section partners have to give balance of
92BA. It has been observed that difficulties are capital accounts in ITR. So, all
being faced by partners (including working partners should have same ITR
partners) as their Income-tax return form requires filing due date as that of a firm.
them to mention the capital balance. It is (SUGGESTION FOR
imperative to note that it becomes quite difficult RATIONALIZATION OF THE
for the partners to mention such capital balance PROVISIONS OF DIRECT TAX
on 31st March in the firm (liable to get its LAWS)
accounts audited and file its return by 30th
November in case of applicability of section 92E
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Sr. Section Issue/Justification Suggestion
No
read with section 92BA)) in his return, until the
audit of such firm is completed. Thus, it is
suggested that said difficulty may be resolved as
it is not practicable to have different dates of filing
for such assessees.
64. Section 139(4) As per section 139(4) pertaining to belated return, It is suggested to amend section
A reasonable a person may furnish the return of any previous 139(4) so as to allow one more
penalty may be year at any time before the end of relevant AY year after the end of AY for
imposed for (w.e.f. AY 2018-19). If a person misses the filling the belated return but with
belated filing aforesaid deadline due to genuine reasons a reasonable amount of penalty
after expiry of beyond his control, he may be allowed to use an say of Rs 100 per day.
time allowed extended date with a reasonable amount of (SUGGESTION FOR
penalty. RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
65. 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,
(ii) Section 139(5) may be
may be included whichever is earlier.
amended to provide for revision
in Sections Similarly, Prior to amendment made by the of return filed in response to
139(4) and 139(5) Finance Act, 2016, Section 139(5) provided that if notice under section 142(1), in
any person, having furnished the return under line with the intent expressed in
sub-section (1), or in pursuance of a notice issued the Explanatory Memorandum.
under sub-section (1) of section 142 discovers
(SUGGESTION FOR
any omission or any wrong statement therein, he
RATIONALIZATION OF THE
may furnish a revised return at any time before
PROVISIONS OF DIRECT TAX
one year from the end of the relevant assessment
LAWS)
year or completion of assessment, whichever is
earlier.
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
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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
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.
66. 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)
67. 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.
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· 139(4D) (SUGGESTION TO IMPROVE
· 139(4E) TAX COLLECTION)
· 139(4F)
68. Under
Section 142A - 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 Alternately, sanction of a higher
report of the Valuation Officer, the Assessing authority must be taken before
Officer may after giving the assessee an any reference is made by the
opportunity of being heard take into account such Assessing Officer.
report for the purpose of assessment or re- (SUGGESTION FOR
assessment. RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
Section 142A did not envisage rejection of books LAWS)
of account as a pre-condition for reference to the
Valuation Officer for estimation of the value of any
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
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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
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.
69. Section 148 - Section 147 empowers an AO to reopen an In view of the aforesaid, it is
Reasons for assessment if he has "reasons to believe" that suggested that it would be more
reopening to be income has escaped assessment. In practice, the appropriate if suitable
sent along with said notice usually does not spell out the reasons amendments be made in section
notice for in proper detail. 147/148 so as to follow the
reopening of The said section does not have any procedural procedure laid down by Hon'ble
assessment requirements, but a practice has developed and Supreme Court in GKN
been laid down by the Hon'ble Supreme Court in Driveshafts (India) Ltd. v ITO
GKN Driveshafts (India) Ltd. v ITO [2003] 259 [2003] 259 ITR 19 (SC) ruling i.e.
ITR 19 (SC) case, to be mandatorily followed to supply reasons along with
while reopening assessment. Presently notice is notice of reassessment and also
issued under section 148. Later, the assessee has to dispose off the objections by
to request for the `reasons for reopening' from the a speaking order.
AO. Thereafter the Assessing officer provides the (SUGGESTION FOR
reasoning. IMPROVING TAX
COLLECTION)
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70. 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
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.
71. Section 159 - Section 159(1) provides that Considering the problems faced
Hardship in "Where a person dies, his legal representative as aforesaid, it is suggested that
obtaining `Legal shall be liable to pay any sum which the deceased a. That the filing of the
Heir Certificate' would have been liable to pay if he had not died, documents at (i) to (iii) should
for the purpose in the like manner and to the same extent as the be made as sufficient
of registering deceased." compliance (i.e. Copy of Death
deceased Certificate, Copy of PAN of
Further, section 159(3) provides that
assessee's legal deceased and Self attested PAN
heir as "The legal representative of the deceased shall,
copy of the Legal Heir).
representative for the purposes of this Act, be deemed to be an
assessee." b. One of the following
assessee for e-
alternatives be provided in the
filing of tax Thus, the legal representative of the deceased
Act in place of legal heir
returns of a assessee needs to comply with various provisions
Certificate:
deceased like filing of Return, payment of taxes, complying
assessee with assessment proceeding on behalf of the i) Affidavit from the legal heir or,
deceased assessee. ii) Certificate of nomination from
institutions like banks or,
iii) Copy of Ration Card
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Filing of tax returns electronically is mandatory for specifying the name and relation
assessees except a few exceptions as provide in with the legal heir.
Rule 12. The Existing procedure to register (SUGGESTION FOR
oneself as legal representative of deceased RATIONALIZATION OF THE
assessee for filing return of income of deceased PROVISIONS OF DIRECT TAX
assessee is described in brief as below: LAWS)
a. The legal representative needs to register
himself as `Legal Heir' on the E -Filing portal in
order to file return of deceased assessee. This is
for the period that Income was earned by the
deceased but cannot be returned by him since he
has since passed away.
b. Request needs to be made through E-Filing
portal for above registration by providing certain
details of deceased assessee along with certain
specified documents.
c. The following are the documents which are to
be submitted/uploaded:
i) Copy of Death Certificate.
ii) Copy of PAN of deceased.
iii) Self attested PAN copy of the Legal Heir.
iv) Legal Heir Certificate issued by the
Court/Local Revenue Authority. or
Surviving member certificate issued by the Local
Authority. Or Pension Order issued by
Central/State Government. Or Registered will.
d. On fulfilling the above details, one can submit
the request and will be provided an
acknowledgement along with a Transaction ID.
e. The department would then `accept/reject' the
request based on the details and documents
uploaded. Where request has been rejected,
department will provide the ground for rejection,
which can be viewed by clicking on Transaction
ID.
4. All the documents as specified in sub-point `c'
above, are generally available or can be easily
obtained except for those specified in (iv).
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The issues faced for obtaining `Legal Heir'
certificate are as under:
a. Obtaining legal heir certificate or Surviving
member certificate from Court/ Local revenue
authority is very time consuming as well as a
cumbersome.
b. Pension Order is issued by Central/State
Government only to its employees and thus any
person other than government employee would
not be able to obtain the Pension Order.
c. While a will may be available in various cases,
registration of a will is not mandatory. Getting a
will registered subsequent to the demise of an
assessee is not possible.
d. Thus taking up a case of a person who is
neither a government employee nor in possession
of registered will, the only option left for him is to
approach Court/Local revenue authority to obtain
the said certificate, which is generally a very
complex exercise with heavy monetary obligations
in terms of cost and time.
72. Section 171 - Section 171(1) provides that an HUF hitherto It is suggested that section 171
Assessment assessed as undivided shall be deemed for the may be suitably amended such
after partition of purposes of this Act to continue to be an HUF, that powers be provided to the
a Hindu except where and in so far as a finding of partition government to notify an
undivided has been given under this section in respect of the Accountant certificate to be
family HUF. issued intimating the partition of
However, currently there is no procedure specified the HUF. Necessary amendments
anywhere regarding intimation of partition by the may be made in the Income-tax
HUF to the concerned AO. Accordingly, it is Rules, 1962 thereafter regarding
desirable that a mechanism may be devised for notification of an accountant
such reporting. An accountant certificate certifying certificate and amendment in ITR
the partition of HUF along with its assets and Forms.
liabilities position and its allocation among its
members would be beneficial to the revenue.
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COLLECTION AND RECOVERY OF TAX
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PART B-DEDUCTION AT SOURCE
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
73. Section 192 There are so many cases relating to It is suggested to insert a
Need for clarity on confusion on TDS on family new section under TDS
TDS on family pension. Some deductors deduct tax provisions taxing family
pension u/s 192 as salary but being the fact pension exceeding say Rs
that the person who is getting the 2,40,000 pa liable for TDS
pension is not employee of the @ 10%. Simultaneously,
organization. Others deduct tax u/s section 192 may be
194A for avoiding any difficulties in amended to specifically
ITR filing of the person getting the exclude taxability of
pension. There are so many cases pension under its
where people get notice from provisions.
department regarding processing of (SUGGESTION FOR
ITR which is due to the section RATIONALIZATION OF
quoted in TDS returns. THE PROVISIONS OF
There must be a specific provision DIRECT TAX LAWS)
for TDS on Family pension.
This would help assessee as well as
department to get rid of
unnecessary time consuming
litigations.
74. 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 exempt. 193 with respect to no
trust defined as Special purpose vehicle has been applicability of tax
per section defined as `an Indian company in withholding on any
10(23FC) 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
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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
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).
75. Section 194A- TDS In various judgments, it has been It is suggested to
on compensation well established that compensation (1) scrap TDS on interest
received under received on Motor Accident Claim is awarded by Motor
Motor Vehicles Act capital receipts and hence does not accident claim Tribunal
even fall within the definition of and
income under Income-tax law and
(2) Insert a specific
hence not taxable. Other reasons
exemption under section
are, MACT compensation is a
10 for amount received on
compensation for agony, loss of
Compensation, enhanced
mobility, physical damage and loss
compensation and
of earnings suffered by the victim,
interest on compensation
granted by courts and not
awarded by Motor
compensation granted under
Accident Claim Tribunal.
statutory provision. In the case of
interest, interest on compensation is
also not taxable on the theory that 194A(3)(ixa) may be
when principal transaction omitted and in section
(Compensation) is outside the ambit 194A(3)(ix), word `or paid'
of taxation, then similar fate must can be inserted between
follow for the subsidiary transaction `credited' and `by way of
(i.e. interest on compensation). interest'.
The matter of MACT compensation
coming to litigation is because of the There are separate
following sections in Income-tax Act, exemptions available
1961- under 10(10B) for
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Sr. Section Issue/Justification Suggestion
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(1) Main reason - Section compensation received
194A(3)(ixa) requiring tax to be by a workman under
deducted on interest on Industrial Dispute Act,
compensation awarded by MACT, under 10(10BB) any
where the aggregate amount of payments received under
Income paid during the financial the Bhopal Gas Leak
year exceeds Rs 50,000/-, Disaster (Processing of
(2) Section 145A(b) requires that Claims) Act, 10(10BC)
Interest received on compensation compensation received
or enhanced compensation shall be from Government on
accounted on receipt basis, account of any disaster.
Likewise, it is suggested
(3) Section 56(2) has listed in
to insert a new section
clause (viii), Income received on
10(10BD) for MACT
compensation or on enhanced
compensation, which can
compensation referred to in Section
be drafted as follows
145A(b) to be taxed under Income
from other source, "any amount received or
receivable by way of
(4) Section 57(iv) allows deduction
compensation or
of 50% of income referred to section
enhanced compensation
56(2)(viii).
or interest on
Even though section 145A(b), compensation awarded
56(2)(viii) and 57(iv) says only about by the Motor Accident
compensation generally, it is section Claim Tribunal ".
194A(3)(ixa) which created biggest
It is also suggested that
problem and confusion because, it
the word to be used in
specifically says about TDS on
10(10BD), should be `any
Interest on Motor Accident Claim
amount', i.e. not just for
Tribunal. Even though provision of
compensation for
TDS and taxable Income works
permanent disability. It
separately under present system of
should also be for
Income Tax, simply by insertion of
temporary disablement.
TDS on interest on MACT has given
Sufferings of temporary
an impression that interest on MACT
disabled claimants
itself is a taxable income which
should also be
created confusion and consequent
considered.
litigations.
(SUGGESTION FOR
1. There are various legal
decisions which ruled that MACT
RATIONALIZATION OF
compensation is ab-initio not an
THE PROVISIONS OF
income. Actually, when something is DIRECT TAX LAWS)
not at all an income and does not
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fall under the purview of Income-tax
Act, 1961 for taxation, there is no
need to give an exemption under
section 10. Only those income which
are otherwise taxable and as a relief
measure, Government wants to not
to tax it, exemption under 10 is to be
provided. Even disaster
compensation mentioned under
section 10(10BC) is not an income
ab-initio for giving an exemption.
However, insertion of such
exemption is clarificatory in nature
and stops any possible litigation,
which is an unwanted wastage of
time and which aggravate the
sufferings of those who have
already suffered the impact of
catastrophe. Hence for MACT
compensation also, on similar line,
an exemption should be provided.
2. Person who is getting
claim under MACT are those who
had already undergone extreme
physical and mental sufferings in
their life and sometimes they are
getting compensation fighting at
court and after waiting for years.
Hence it is highly required to bring
this clarification so that they need
not suffer again after getting
compensation. As a social measure,
suitable amendment and clarity
should be brought under Income
Tax law for this.
3. There is no exact method
on how 50% is arrived for section
57(iv) deductions and it is not
sufficient in many cases.
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76. Section 194A The present threshold limit of Rs. It is suggested to raise
Need to raise 5000.00 for deduction by other than the threshold limit of Rs.
threshold limit Banks is very old and is too low. 5000.00 to Rs 10,000 u/s
from 5,000 to Rs This limit of Rs. 5000.00 u/s 194A 194A applicable to
10,000 was fixed long ago, which is as deductors other than
much as 30 years ago. The basic bank.
exemption limit has increased multi- (SUGGESTION FOR
fold but this remained at the same RATIONALIZATION OF
level since then. This needs THE PROVISIONS OF
immediate change. Once the limit is DIRECT TAX LAWS)
raised to Rs 10,000 then there
would be two thresholds only u/s
194A i.e 10,000 and 50,000 making
compliance easier.
77. 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
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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.
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).
78. 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
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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
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
However, some companies are before the threshold limit
trying to change the way people crosses, it will not be
transact and even on small outlets acceptable by the
like Pan-shops, nearby grocery merchants;
shops, the companies are pushing - There are enormous
to transact digitally using e-Wallet. number of transactions
It requires a lot of push as this with these small outlets /
entails a behavioral change for the merchants, due to which
customer who needs to change his the exercise of Income-
preferred mode of payment from tax department also gets
cash to digital mode as well as for burdened (i.e.,
the merchant who is also supposed humongous data in the
to accept payments digitally instead TDS return, issuance of
of traditional cash. TDS certificates,
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 behavior,
the verification /
government is giving incentives.
reconciliation of such
Similar incentives are proposed by
humongous data.
the private players also. These
small incentives will go a long way (SUGGESTION FOR
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to make behavioural changes. REMOVAL OF
It is to be noted here that there are ADMINISTRATIVE AND
voluminous transactions, but the PROCEDURAL
incentive in absolute amount is very DIFFICULTIES
low. The number of merchants to be RELATING TO DIRECT
benefitted from the incentive TAXES)
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
Act, 1961 and thus, applicability of
TDS provisions will arise.
79. 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)
80. Section 194-IA As per the provisions of section 194- It is suggested that
Reduction in IA, tax is to be deducted @ 1% on section 194-IA be
threshold limit to consideration for transfer of amended so as to reduce
Rs. 30,00,000 immovable property, other than the threshold limit to
agricultural land. However, no tax is deduct tax from Rs. 50
to be deducted if the consideration lakhs currently to Rs. 30
for transfer of immovable property is lakhs.
less than Rs. 50 lakhs. (SUGGESTION FOR
Due to this high threshold of Rs. 50 IMPROVING TAX
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lakhs, some of the unscrupulous COLLECTION)
assessees are getting the property
registered at just under Rs. 50 lakhs
of sale consideration to avoid TDS
u/s 194-IA. Also, as per Income-tax
Rules, any sale purchase of
property whose stamp duty value
exceeds Rs. 30,00,000 needs to be
reported in Statement of Financial
Transaction.
81. 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.
82. Section 194N - The Finance (No. 2) Act, 2019 has (i) It is suggested that the
Practical difficulties introduced a new section 194N in intent expressed in the
order to discourage cash budget speech w.r.t
to be faced and
transactions by levying TDS @ 2% discouraging making of
clarifications
on cash withdrawals exceeding Rs 1 business payments in
required regarding crore from banks including co- cash for introducing
implementation of operative banks or post offices section 194N may be
proposed provision subject to certain exceptions as suitably incorporated in
of TDS @ 2% on provided therein. There are certain the text of section 194N
cash withdrawals concerns with regard to i.e. withdrawals from only
exceeding Rs implementation of provisions which current account may be
1,00,00,000 needs to be addressed. taken into account for
TDS purposes. This will
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Issue I: also align with provisions
of seventh proviso to
Minor inconsistency between section 139(1) (mandatory
budget speech and finance bill ITR filing for deposits
exceeding Rs 1 crore in
We refer to para 126 of the budget current account).
speech (relevant extract reproduced (SUGGESTIONS FOR
below): RATIONALIZATION OF
THE PROVISIONS OF
"To promote digital payments DIRECT TAX LAWS)
further, I propose to take a slew of
measures. To discourage the
practice of making business
payments in cash, I propose to levy
TDS of 2% on cash withdrawal
exceeding ` 1 crore in a year from a
bank account." [emphasis supplied]
The Hon'ble FM referred to
discouraging `business' payments in
cash while introducing provisions of
section 194N. Payments for
business are usually made from
`current account' maintained with
banks. However, the text of the
section 194N as per Finance (No. 2)
Act, 2019 levies TDS on withdrawal
from all types of accounts, be it
current or saving or any other
account maintained with the
specified authority. The
inconsistency between budget
speech and the finance Act needs
clarification.
Issue II: (ii) It is suggested that the
term `recipient' may not
Term `recipient' may not convey be required in section
the right meaning 194N and hence,
following change may be
Relevant provision of section 194N made:
reads as under:
"who is responsible for
"Every person, being, paying any sum, or, as
the case may be,
(i) a banking company to which the aggregate of sums, in
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Banking Regulation Act, 1949 cash, in excess of one
applies (including any bank or crore rupees during the
banking institution referred to in previous year, to any
section 51 of that Act); person (herein referred to
(ii) a co-operative society engaged as the recipient) from an
in carrying on the business of account maintained by
banking; or the recipient with it shall,
(iii) a post office, at the time of payment of
such sum, deduct an
who is responsible for paying any amount equal to two per
sum, or, as the case may be, cent. of sum exceeding
aggregate of sums, in cash, in one crore rupees, as
excess of one crore rupees during income-tax"
the previous year, to any person (SUGGESTIONS FOR
(herein referred to as the RATIONALIZATION OF
recipient) from one or more THE PROVISIONS OF
accounts maintained by the DIRECT TAX LAWS)
recipient with it shall, at the time of
payment of such sum, deduct an
amount equal to two per cent. of
sum exceeding one crore rupees, as
income-tax:"
Referring to the term `recipient' as
used above, it may be noted that the
said term is not defined anywhere.
Also, reference to `any person' is
restricted to the `recipient'. It is
stated that the account is to be
maintained by the recipient. It may
be possible that the `recipient' and
the `account holder' are two different
persons. However, the intent of the
amendment seems to identify
`recipient' as an account holder. If it
is so, then if a person other than
account holder withdraws amount;
will this section be not applicable, or
TDS would be levied, needs to be
clarified.
83. Section 197A Section 197A deals with provisions It is suggested that
Certain assessees for non-deduction to be made in section 197A may be
certain cases. Further, Rule 29C suitably amended so that
may be allowed
authorizes for furnishing of Form certain assessees like
benefit
No. 15G/H in such specified cases those registered under
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No
so that no tax is deducted at source. section 12A can also file
However, currently in most cases Form No. 15G/H (via
only individuals and HUFs are able suitable amendment in
to claim the benefit of section 197A. rule 29C).
There are certain other assessees (SUGGESTIONS FOR
who are made to file ITR forms to RATIONALIZATION OF
claim refund although in most cases THE PROVISIONS OF
either income is exempt or below DIRECT TAX LAWS)
the minimum threshold limit
applicable to tax.
84. 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
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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
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
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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.
85. Section 204 Issue As per section 204, person It is suggested that in
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 authorized 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.
86. 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 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)
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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
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.
87. Section 206C(1F) Section 206C(1F) provides for It is suggested that
to increase scope collection of tax @ 1% by seller section 206C(1F) be
of TCS to all from buyer in case sale amended so as to include
transactions of consideration of car exceeds Rs 10 within its ambit all goods
goods/services lakhs. Due to advancement of and services transactions
technology and digitization in exceeding Rs 10 lakhs
economy and introduction of GST excluding transactions on
law, time has come now when the which TDS is applicable
said provision of TCS can be as well as Export
extended to cover all goods and transactions.
services transactions exceeding Rs (SUGGESTION FOR
10 lakh subject to certain IMPROVING TAX
exceptions. This will bring a lot COLLECTION)
more people into the tax net and will
also pave way for formalization of
economy.
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PART C-ADVANCE PAYMENT OF TAX
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
88. 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
89. 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
90. 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 The Finance Act 2018 has under section 271J
imposed by amended clause (a) of section appealable to the
Assessing Officer 253(1) so as to make an order Commissioner (appeals)
under section passed by a Commissioner u/s 246A.
271J (Appeals) under section 271J (SUGGESTION FOR
also appealable to the Appellate RATIONALIZATION OF
Tribunal. THE PROVISIONS OF
This amendment is applicable DIRECT TAX LAWS)
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
91. 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
92. 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
a) Penalty section 253 providing for appeal
order under to Tribunal against such penalty
section 270A order, no such amendment has
be made an been made in section 246A.
order In a case where the said penalty
appealable order is imposed by an Assessing
before Officer below the rank of
Commission Commissioner, it is desirable that
er (Appeals) an appeal may be filed against
under the same to Commissioner
section 246A (Appeals). It may be noted that
the penalty order under the
erstwhile section 271 is an
appealable order under section
246A. There appears to be an
inadvertent omission in not
including an order under section
270A as an order appealable
before Commissioner (Appeals)
under section 246A.
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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initiate the proceedings prior to
or concurrently with the
closure of assessment
proceedings. Unless this is
done, there may be initiation of
penalty several years after the
assessment proceedings are
completed. The time limit under
section 275(c) is, unfortunately,
linked with the date of initiation
of proceedings.
· Unlike Explanation 3 of
section 271(1)(c), in this
provision, where return of
income is not furnished,
penalty will be calculated with
reference to tax on income
assessed without considering
the impact of tax deducted or
advance tax paid by taxpayer.
For example, in case of a
person who is not required to
furnish return of income under
section 115A(5), tax may have
been paid, but, as per new
methodology, the whole of the
income, as assessed, may be
considered as unreported
income. Such would also be the
case in a situation where there
is no revenue loss since the
whole of the tax was already
paid up and yet, the return may
not have been furnished.
· There may be some concern
on resolution of the formula
specified in the section if,
intimation under section
143(1)(a) is not available. It may
be good to clarify that, in such
a case, returned income will be
the substituted basis.
· Penalty proceedings may be
permitted only when specific
conditions are satisfied. e.g.
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the 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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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%.
93. 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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(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.
94. Section · Amended Section 271AAB It is suggested that the
271AAB - provides for imposition of penalty provisions of section 271AAB
Need to @ 10% on undisclosed income needs to be simplified. The time
simplify found during the course of search of admission may not be
penal and admitted at the stage of considered for imposition of
provisions search subject to fulfilment of penalty amount as once
other specified conditions in admitted all culprit assesses
section 271AAB(1A)(a) 60% should be treated on the same
penalty is to be imposed in other footings.
cases u/s 271AAB(1A)(b). (SUGGESTION FOR
· The above system of penalty is RATIONALIZATION OF THE
very complex to implement in PROVISIONS OF DIRECT
reality. In search cases, penalty TAX LAWS)
should ideally be the same
irrespective of the time of
admission/declaration by the
culprit assessee. Assessing
officers sometimes puts undue
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.
95. 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
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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
prosecution provisions should be
made applicable only in respect
of cases covered under clause
(b).
96. 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
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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.
97. 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
appealability 285BA(1), fails to furnish such against an order passed by DIT
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
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
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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
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
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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.
98. 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, 31st 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
ending 30 th June, 30 th September, deducted or collected,
31 December and 31 March.
st st 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
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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.
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.
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99. 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
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
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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
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
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 133
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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.
100. Section The Finance (No. 2) Act, 2019 It is suggested that the
276CC amended section 276CC so as to amendment in section 276CC
Amendment make the legislative intent clear made vide the Finance (no. 2)
w.r.t. and to include the self- Act, 2019 w.r.t. calculation of
clarification assessment tax, if any, paid tax payable to be determined
regarding before the expiry of the after reducing tax collected at
inclusion of assessment year, and tax source and self-assessment tax
amount of collected at source for the be made applicable from a
advance tax purpose of determining tax retrospective date being in the
paid and tax liability. nature of clarification.
collected at The aforesaid amendment is (SUGGESTION FOR
source may made applicable w.e.f. RATIONALIZATION OF THE
be made 01.04.2020. PROVISIONS OF DIRECT
applicable TAX LAWS)
Since it is a clarificatory
with
amendment as is clear from the
retrospective
Explanatory Memorandum, it
effect
should ideally be made applicable
from a retrospective date so as to
provide the benefit of clarification
made to existing cases that are
going on.
101. Chapter In recent times, there is a spurt It is suggested that in case
XXII - in prosecution proceedings tax and due interest is paid
Prosecutio under the Income-tax law. by the assessee under
n Prosecution proceedings are Income-tax Act 1961, then
proceeding governed by Chapter XXII of prosecution proceedings
s not to be the Income-tax Act, 1961. It may be dropped subject to
imposed in causes some serious certain exceptions as may
case tax hardships to the concerned be appropriately specified.
and assessee. In case tax and due (SUGGESTIONS TO REDUCE /
interest interest is paid, currently MINIMIZE LITIGATIONS)
paid prosecution proceedings still
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take place against the
assessee although revenue is
in no loss.
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 135
The Institute of Chartered Accountants of India
CHAPTER XXIII
MISCELLANEOUS
Page 136 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No.
102. Section 288 - This section empowers an AR to appear It is recommended that
Appearance by before the any income- tax authority or the the clause (2)(vii) has
Authorized Appellate tribunal in connection with any become redundant
Representative proceeding under this Act. looking at the age factor
Under clause (2)(vii), any other person who, that the person may have
immediately after commencement of this obtained as on date.
Act, was an income-tax practitioner within (SUGGESTION FOR
the meaning of clause (iv) of sub-section (2) RATIONALIZATION OF
of section 61 of the Indian Income-tax Act, THE PROVISIONS OF
1922 (11 of 1922), and was actually DIRECT TAX LAWS)
practicing as such.
103. 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
section 288(2) Explanation to section 288(2) was last amended 288(2) of the Income-tax
pertaining to vide the Finance Act, 2015. The relevant extract Act, 1961 may be modified
definition of of the amended Explanation to section 288(2) is suitably to remove the
`Accountant' as follows: applicability of section
"Explanation.--In this section, "accountant" 141(3) of the Companies
means a chartered accountant as defined in Act, 2013 so that:
clause (b) of subsection (1) of section 2 of the
Chartered Accountants Act, 1949 (38 of 1949) a. A CA providing
who holds a valid certificate of practice under tax certification services to
sub-section (1) of section 6 of that Act, but does a company of which he is
not include [except for the purposes of not the statutory auditor
representing the assessee under sub-section has the same opportunity
(1)]-- to provide the NAS to a
(a) in case of an assessee, being a company, company as a CA who is
the person who is not eligible for not providing tax
appointment as an auditor of the said certification services but is
company in accordance with the provisions providing tax advisory
of sub-section (3) of section 141 of the services and other NAS to
Companies Act, 2013 (18 of 2013); or a company of which he is
(b) in any other case, --....................." not a statutory auditor to
{Emphasis provided} avoid unreasonable
compliance requirements.
The reason for amending the definition of an
"accountant" as per the Expl anatory
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 137
The Institute of Chartered Accountants of India
Memorandum to the Finance Bill 2015 was to b. Requirements
avoid conflict of interest and for better prescribed for non-
governance. Infact, this amendment was company assessees should
brought in for the limited purpose of be made applicable to
disqualifying a relative from conducting the tax company assessees to
audit report based on a CAG report finding. ensure parity in
In case of an assessee, being a company, the applicability of the
disqualification for being appointed as an eligibility requirements for
`accountant' for tax certification services applies being an `accountant'.
to the person who is not eligible for Further, term "Relative" as
appointment as an auditor of the said company used in sub-clause (iv) and
in accordance with the provisions of section (vii) of clause (b)
141(3) of the Companies Act, 2013. Relevant Explanation to section
extract from section 141(3) is reproduced 288(2) may be replaced
below: with "Immediate Family"
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,
namely:-- (SUGGESTION FOR
...........
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
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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
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 ex planation 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
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The Institute of Chartered Accountants of India
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
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
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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 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
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The Institute of Chartered Accountants of India
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".
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.
104. Computation of As per the extant provisions under section The profits earned during
MAT profit in case 115JB pertaining to computation of book profits the CIRP and the period
for MAT purposes, the amount of profits of sick during which the resolution
of companies
industrial company from the assessment year in plan is implemented should
undergoing
which the said company had become sick be excluded from `Book
Corporate industrial company under SICA, till the year in profits' computed for MAT
Insolvency which the entire net worth equals or exceeds purposes.
Resolution Process the accumulated losses, is reduced from the
under the profit as shown in the profit and loss statement. The amount of loan/liability
Insolvency Code,
waived and credited to
2016
profit and loss account
should be reduced from the
`Book Profits' computed for
the purpose of MAT.
(SUGGESTION FOR
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REDUCING/MINIMIZING
LITIGATIONS)
105. Conversion of Section 47(x) exempts conversion of bonds or Indian start-ups were
convertible debentures or debenture-stock or deposit allowed to issue CNs to
resident individuals. RBI
notes into certificate in any form, into shares or debenture
has permitted a person
shares of that company, from capital gains tax liability.
resident outside India to
However, the conversion of Convertible Notes purchase CNs issued by an
(CNs) issued by an Indian start- up into shares Indian start-up company
or debentures is not specifically exempted. for INR 25 lakhs or more in
a single 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.
2.
106. Section 43CA, 50C The existing provisions of section 43CA i. The erstwhile
and 56 Allowance (business profits), 50C (capital gains) and 56 provisions dealing with
of variation of 5% (income from other sources) while taxing transfer of immovable
between stamp
income arising out of transactions in immovable property for lower
duty value and the
property require adoption of the sale consideration had delta
sale consideration
Increasing the consideration or stamp duty value, whichever is of 15% and 25%
permissible higher. respectively in section
variation and need However, to minimize hardship in case of 52(2) and section
for retrospective genuine transactions in the real estate sector, 269C(2)(a) of the Act.
amendment the Finance Act 2018 amended the said The present delta of 5%
sections to provide that no adjustments shall be is accordingly far too
made in a case where the variation between inadequate and may be
stamp duty value and the sale consideration is increased to atleast
not more than five percent of the sale 15%.
consideration.
The Finance Act 2018 provided that in cases ii. Also, since the
where the stamp duty value of immoveable amendment is
property does not exceed 105% of rationalisation measure
consideration received/receivable on transfer of it may be made
capital asset/stock in trade being land or applicable from the
building or both, consideration date the provisions
received/receivable shall be full value of were inserted.
consideration. (SUGGESTION FOR
Similarly, it provided that where the stamp duty RATIONALIZATION OF
value does not exceed 105% of consideration THE PROVISIONS OF
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The Institute of Chartered Accountants of India
paid to acquire immovable property, there will DIRECT TAX LAWS)
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
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%)
107. Exemptions Skill Section 11 and 12 Exemption of Income of It is suggested to include
Development specified public charitable and religious trusts institutions exclusively
At present, Skill development Program activity engaged in "Skill
is 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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108. Tracking the un- At present, there is no mechanism provided in It is suggested that the
spent portion of the Act/Rules for tracking the un-spent portion relevant rules/Act can be
capital gain of capital gain deposit. Only when the amended to provide that
deposit Levy assessees want to withdraw the money the un-spent amount can
TDS at the time of (otherwise than for house construction), some be released by the bank
withdrawal banks insist on tax clearance certificate, while after deducting 20% thereof
other banks simply make payment of the which can be remitted to
balance amount. The assessees are also the Government by way of
finding it difficult to obtain the tax clearance TDS.
certificate. (SUGGESTION FOR
IMPROVING TAX
COLLECTION)
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The Institute of Chartered Accountants of India
OTHERS
Page 146 Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation)
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
109. 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.
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.
110. 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.
111. Section One of the important reasons for mismatch Considering the
154/155(14) of TDS claimed and TDS as per Form aforesaid difficulties, it
- Different 26AS is adoption of different method of is suggested that
Methods of accounting (i. e. Cash or Mercantile) by the section 154/155(14) be
accounting deductor and deductee. Various situations appropriately amended
followed by that may arise have been explained below so that errors and
the by means of examples: omissions like non-
deductor claiming of TDS be
and included therein.
i) Deductor Mercantile system of
deductee Further, the aforesaid
accounting
Rule 37BA amendment being
Deductee Cash system of accounting clarificatory in nature
If the deductor follows mercantile system should be given
of accounting, the tax would be deducted retrospective effect so
at source and deposited in the year in as to allow genuine
which provision is made. Whereas the taxpayers to claim credit
deductee following the cash basis of
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Sr. Section Issue/Justification Suggestion
No.
accounting, would offer the income and of TDS in case not
claim TDS in the year in which the amount claimed in the return of
is actually received by him. For example, income for any reason.
audit fees paid to a Chartered accountant's
firm by a company. In such a case it is TDS should not be
difficult for the deductee to claim TDS as linked with the year of
the TDS certificate is issued in respect of income or the year of
the year other than the year in which it is receipt. Credit for TDS
claimed. may be given on the
Also, in some cases, the receipts may be basis of the claim made
spread over in two or more years. In such by the assessee
cases, there is difficulty in getting credit of irrespective of the
TDS in second and subsequent year in assessment year in
which amount is actually received. which income is
received or income is
(ii) Deductor Cash system of offered to tax. There
accounting should be a clear
differentiation between
Deductee Mercantile system of
amount deducted and
accounting
amount claimed. The
There is a provision to take the credit TDS not claimed in a
of TDS in the year in which income is particular year due to
assessable to tax. If for any any reason may either
reason, TDS certificate has not been be allowed to be claimed
furnished; such certificate can be produced in the any other
within two years u/s 155 of the Income-tax assessment year or to
Act. But issue generally arises when the be refunded to the
following situation occurs: deductee. The total TDS
In case of a deductee who maintains books claimed and the balance,
of accounts on mercantile basis. The if any, may be reflected
amount due to him in respect of a in Form 26AS. Form No.
government contract is accounted for in his 26AS should be made as
books of accounts in a particular year and a bank pass book where
advance tax/ self-assessment tax is paid by the unclaimed credit is
him in respect of that income. However, the allowed to be carried
government which maintains books of forward for claiming in
account on payment basis pays the amount the next year.
after two years after deducting tax at (SUGGESTIONS FOR
source. In such a case, the assessee would REMOVING
neither be entitled to claim credit of TDS in ADMINISTRATIVE AND
the year of receipt as the income has PROCEDURAL
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Sr. Section Issue/Justification Suggestion
No.
already been offered to tax in an earlier DIFFICULTIES RELATING
year nor he would be able to get refund of TO DIRECT TAXES)
tax paid by him as the time to file revised
return may also have expired. This amounts
to payment of tax twice to the government.
112. 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 DIFFICULTIES)
details of parties with PAN and section under
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.
113. Time to bring During the last budget, Government has It is suggested that
an amnesty introduced the Sabka Vishwas (Legacy Dispute considering the huge
scheme on Resolution) Scheme, 2019 ("SVLDRS") which is backlog in Indian
the lines of operational from 1st September,2019 till 31st Judiciary, the Government
Sabka December,2019. This scheme is introduced to may consider brining in a
Vishwas resolve all disputes relating to the erstwhile similar scheme under
(Legacy Service Tax and Central Excise Acts [and rules income taxation law on the
Dispute made thereunder as well as 26 other Indirect lines of Sabka Vishwas
Resolution) Tax enactments.] (Legacy Dispute
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Sr. Section Issue/Justification Suggestion
No.
Scheme, A similar scheme was brought by CBDT in 2016 Resolution) Scheme, 2019.
2019 i.e. "Income "Declaration Scheme, 2016" (IDS) (SUGGESTIONS TO
which was higly successful. Now the time has REMOVE
come to bring another similar scheme on the ADMINISTRATIVE
lines of Sabka Vishwas (Legacy Dispute DIFFICULTIES)
Resolution) Scheme, 2019. A mjor difference
between the IDS and SVLDRS is that under
SVLDRS, the concerned assessee can
approach High Court and Supreme Court in
case of any further grievance whereas this
option was not available under the IDS.
114. Tax Background It is suggested that
consolidatio In India, separate entities are incorporated government may consider
n Scheme based on their specialization in various lines of introducing the concept of
businesses by the parent company. The group tax consolidation scheme
as a whole and the tax Department face many considering the mutual
challenges. Some of them are:- benefits to both tax
department and the
· Each Entity is required to file a
assessees.
separate income tax return
involving huge cost of compliance. (SUGGESTIONS TO
· Each entity is assessed / REMOVE
scrutinised separately for intra- ADMINISTRATIVE
group transactions resulting in DIFFICULTIES)
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 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.
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Benefits
· Tax consolidation scheme would help to
centralize the planning and payment of tax by
the parent company. The company can set off
the losses of one inter group company with the
profits of another company.
· Tax Consolidation will help in tax free
movement of assets across the group which
would aid in internal restructuring and optimum
utilisation of resources.
· The number of litigations pending with the tax
department would also reduce and thereby
reducing the administrative cost of the Income-
tax Department.
· The tax consolidation regime has been
adopted in tax legislations of a number of
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.
· 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.
115. Need to Partnership Firms are taxed at 30%. Corporate Partnership firms having
reduce tax tax rates are reduced to 25% and 22% subject turnover up to certain limit
rate of to certain conditions. But partnership firms pay can also be taxed on par
partnership higher tax irrespective of turnover. with corporate. i.e. at 25%
firms in line Partnership firms taxation should be reduced to or 22%.
with encourage starting new ventures where money (SUGGESTIONS TO
corporate tax need to be invested by one and intellectuals REMOVE
rate and expert people etc. If Government reduces ADMINISTRATIVE
reduction tax, more business entities may come up. DIFFICULTIES)
Now, for any amount earned 30% tax is
forgone to business. Whereas for company it
is not like that. To encourage small and
medium enterprise this tax should be reduced
immediately.
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Sr. Section Issue/Justification Suggestion
No.
116. Rule 31 - Regulation in force It is suggested that TDS
TDS credit Section 203 of the Act requires the deductor of credit should be allowed
should be tax to issue the TDS certificate to the purely on the basis of
allowed deductee to the effect that tax has been Form 26AS (irrespective of
solely on the deducted and specifying the amount so the fact whether the same
basis of deducted. The deductor has to log in to the has been claimed in the
Form No. TDS CPC website and download the certificate return or not) and the
26AS and of the deductee and then send such certificate procedural requirement for
procedural to the deductee. issue or obtaining of TDS
requirements certificate in the Form 16A
The procedural compliance apparently looks
for issuance should be dispensed with.
easy and very convenient. However, in reality,
of TDS CBDT must ensure that
the deductors and deductees face numerous
certificates this is implemented at
difficulties in practically complying with the
(Form No. 16 ground level and AO grant
same. These difficulties are explained as
/ 16A) should TDS credit as per form
follows:
be dispensed 26AS and do not insist for
with Practical difficulties faced by deductor production of Form 16A.
Every quarter the deductor is required to login Further, deductee be
into the TDS Reconciliation Analysis and provided facility to
Correction Enabling System (TRACES) download Form no. 16/16A
website and download TDS certificate for all himself instead of
the deductees and forward the same to each depending/waiting on
deductee. In case deductor is a big deductor to issue the
organisation which has deducted TDS for same.
thousands of parties, it is required to send the
Also, generation of form
TDS certificate through mail or post separately
no. 16/16A be made
to each deductee. Issuing TDS certificate to
optional and not
thousands of parties every quarter poses
mandatory for the
challenges and also consumes lot of time
deductor. This will save
which can otherwise be used for operations of
huge amount of time and
the deductor. This sometimes leads to
resources from deductor
incomplete compliance or non-compliance with
point of view.
provisions of issue of TDS certificates.
Currently, request is being
Though there are penal provisions provided
placed by the deductor for
under the Act for non-issuance of TDS
downloading form no
certificate by the deductor, in practice the AO
16/16A which may be done
do not enforce those provisions.
away with and form 16/16A
Practical difficulties faced by the deductee be available for download
It is the deductee who actually suffers by way automatically without any
of denial of TDS credit in absence of TDS request for the same.
certificate and therefore, it is a must for the (SUGGESTIONS TO
deductee to continuously chase each deductor
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Sr. Section Issue/Justification Suggestion
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for issue of TDS certificate. It may be relevant REMOVE
to mention here that the AO's do not always ADMINISTRATIVE
give TDS credit, especially for years in the DIFFICULTIES)
past, on basis of Form No. 26AS appearing in
the system but require hard copies of the TDS
certificates.
Section 199 of the Act and Rule 37BA of
Income-tax Rules in relation to grant of TDS
credit
Conjoint reading of the Section 199 of the Act
and Rule 37BA of the Rules framed
thereunder suggests that credit for the tax
deduction should be given/granted on the
basis of information relating to deduction
furnished by the deductor (i.e. Form 26AS)
and the information in the return of income of
the claimant. The requisite details in respect of
the tax deducted at source are available in
Form 26AS. The taxpayer may furnish the
information relating to tax deducted at source
in the return of income based on the details
available in Form 26AS leading to inference
that both the information furnished by deductor
and information in the return of income are
same i.e. as per Form 26AS.
CBDT Circulars on issuing of TDS certificate
The CBDT vide Circular No 3/2011 dated 13
May 2011 and Circular No 1/2012 dated 9
April 2012 has mandated for all deductors to
issue Form 16A which is generated from TIN
(Tax Information Network) website.
· Further the CBDT in para 3 of Circular
No 3/2011 specifically mentioned as
under:
"3. The Department has already enabled the
online viewing of Form No. 26AS by deductees
which contains TDS details of the deductee
based on the TDS statement (e-TDS
statement) filed electronically by the deductor.
Ideally, there should not be any mismatch
between the figures reported in TDS certificate
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Sr. Section Issue/Justification Suggestion
No.
in Form No. 16A issued by the deductor and
figures contained in Form No.26AS which has
been generated on the basis of e-TDS
statement filed by the deductor. However, it
has been found that in some cases the figures
contained in Form No. 26AS are different from
the figures reported in Form No.16A. The gaps
in Form No. 26AS and TDS certificate in Form
No. 16A arise mainly on account of wrong data
entry by the deductor or non-filing of e-TDS
statement by the deductor. As at present, the
activity of issuance of Form No.16A is distinct
and independent of filing of e-TDS statement,
the chances of mismatch between TDS
certificate in Form No.16A and Form No. 26AS
cannot be completely ruled out. To overcome
the challenge of mismatch, a common link has
now been created between the TDS certificate
in Form No.16A and Form No. 26AS through a
facility in the Tax Information Network website
(TIN Website) which will enable a deductor to
download TDS certificate in Form No.16A from
the TIN Website based on the figures reported
in e-TDS statement filed by him. As both Form
No.16A and Form No.26AS will be generated
on the basis of figures reported by the
deductor in the e-TDS statement filed, the
likelihood of mismatch between Form No.16A
and Form No.26AS will be completely
eliminated".
· CBDT Instruction No. 4/2012 [F. No.
225/34/2011-ITA.II] dated 25 May
2012 states that "where the difference
between the TDS claim and matching
TDS amount reported in AS-26 data
does not exceed Rs Five thousand,
the TDS claim may be accepted
without verification." CBDT Instruction
1 / 2012 dated 2 February 2012 and
Instruction 2 / 2011 dated 9 February
2011 provides similarly.
· CBDT Instruction No. 4/2014 [F. No.
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No.
225/151/2014/ITA.II] dated 7 April
2014 at para (5.2.a) reads "AO should
verify whether TDS credits claimed by
the taxpayer are available in the
26AS. If the credits are available in
26AS, a suitable rectification
order......should be passed".
· CBDT'S Action Plan for the First
Quarter of FY 2015-16 dated 24
March 2015 refers to "....(b) Giving
credit for prepaid taxes, reflected in
Form 26AS post processing....".
The above clearly demonstrates that there
would not be any variation between TDS credit
reflecting in the Form 26AS and TDS credit as
per Form 16A. Further, in addition to these
circulars, the CBDT in Central Actions plan of
2015 has also directed to give TDS credit on
the basis of Form 26AS. Thus, reducing the
relevance of Form 16A for the purpose of
claiming TDS credit.
It is requested that CBDT may call for details of
cases in which TDS credit has been denied on
the basis that credit was available on the basis
of Form 26AS but not on basis of data in
department's system. This would demonstrate
that the CBDT instructions are not clear at the
ground level. We also request that once again
clear instructions may be reiterated to the field
officers.
117. Reconciliatio In order to make the process of claim of TDS The mentioned circular is
n of each error free, a system was devised some years suggested to be
payment ago in 2009 and published vide Circular no implemented with
made by 2/2009, dated 21.05.2009. The relevant excerpt appropriate modifications
deductor to from the said circular is as follows: in light of the current
avoid "12. With a view to enabling the implementation technological
duplication of of the aforesaid decision, the TDS and TCS advancements.
work of TDS payment and information reporting system has (SUGGESTION FOR
return been redesigned vide Notification No. 858(E), RATIONALIZATION OF
dated 25th March, 2009 published in Official THE PROVISIONS OF
Gazette. The salient features of the new TDS DIRECT TAX LAWS)
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Sr. Section Issue/Justification Suggestion
No.
and TCS payment and information reporting
system are the following: --
(i) The new system has been harmonized
for all deductors (including Central and State
Governments). Therefore, like non-
governmental tax deductors, every deductor in
the Central and State Government have also
been made responsible for making direct
payment of TDS in the bank. They are no
longer allowed to make payments of the TDS
and TCS by making book adjustments or
consolidated payments. As a result, the TDS
payment and information reporting system will
be uniform across deductors.
(ii) Rule 30 and Rule 37CA of the Income-tax
Rules, 1962 have been substituted to provide,
inter alia, for the following: --
(a) All sums of tax deducted at
source under Chapter XVII-B and of tax
collected at source under Chapter XVII-BB
shall, in general, be paid to the credit of the
Central Government within one week from the
end of the month in which the deduction, or
collection, is made. Similarly, the same time-
limit for payment will also apply for income-tax
due under sub-section (1A) of section 192.
(b) It is mandatory for all deductors
(including Central Government and State
Governments) to pay the amount by
electronically remitting it into the RBI, SBI or
any authorized bank.
(c) It is mandatory for all deductors
(including Central Government and State
Governments) to make the payment by
electronically furnishing an income-tax challan
in Form No. 17.
(iii) In the process of electronically furnishing
the income-tax challan in Form No. 17, the
deductor will be simultaneously required to
furnish to the Taxpayer Information Network
(TIN) system maintained by National Securities
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No.
Depository Limited (NSDL) either through
screen-based upload or file upload, three basic
information relating to the deduction i.e., PAN,
name of the deductee and amount of
TDS/TCS.
(iv) Upon successful remittance of the
TDS/TCS to Central Government account and
the uploading of the basic information as
mentioned above to the TIN system, every
deduction record will be assigned a Unique
Transaction Number (UTN).
(v) NSDL will create a facility to e-mail the
UTN file to the deductor if the e-mail address of
the deductor is available with them. In addition,
they will also create a facility for the deductor
to download the UTN file.
(vi) The UTN will be required to be quoted by
the deductor on the TDS/TCS certificate issued
by him to the deductee.
(vii) NSDL will also create a facility to allow
independent viewing of the UTNs by the
deductee.
(viii) With a view to enabling the Income-tax
Department to monitor compliance by the
deductor with the TDS provisions, every person
(including Central Government and State
Government) who has obtained a Tax
Deduction or Collection Account Number (TAN)
shall electronically furnish a quarterly
statement of compliance with TDS provisions in
Form No. 24C. It is mandatory for all TAN
holders to furnish this form irrespective of
whether any payment liable to TDS has been
made or not. This form shall be furnished on or
before the 15th July, the 15th October, the 15th
January in respect of the first three quarters of
the financial year, respectively, and on or
before the 15th June following the last quarter
of the financial year. This e-form No. 24C has
to be furnished at
http://incometaxindiaefiling.gov.in. The first
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Sr. Section Issue/Justification Suggestion
No.
quarter in respect of which Form 24C is
required to be furnished is the quarter ending
on 30th June, 2009.
(ix) In order to enable the deductor to furnish
the UTN to the deductee, the existing Form 16
and Form 16A have been appropriately
modified.
(x) The quarterly returns of TDS and TCS
hitherto required to be filed in Form No. 24Q,
Form No. 26Q, Form No. 27Q and Form No.
27EQ shall now be required to be filed for all
quarters on or before the 15th June following
the financial year. Effectively, the quarterly
returns have now been replaced by an annual
return."
As is clear from the above reproduced para
from the said circular, the proposed method
will automatically verify each payment of TDS
made by deductor and will reduce the
duplicacy done while filing quarterly TDS
statements. The above method will effectively
lead to an annual TDS return instead of
quarterly TDS statements currently.
X-X-X
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PART C
SUGGESTIONS PERTAINING TO
INTERNATIONAL TAXATION
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
118. 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.
119. 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
· The date of valuation of assets (without than amalgamation
reducing the liabilities) shall be as at the end and demerger) should
of the accounting period preceding the date also be exempt from
of transfer. However, in case the valuation of the indirect transfer
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assets as on the date of transfer exceeds by provisions.
at least 15 per cent of book value of the
assets as on the date on which the
accounting period of the company/entity · While Explanation 5 to
ends preceding the date of transfer, then the Section 9(1)(i) of the
specified date shall be the date of transfer. Act provides that
shares of a foreign
· Exemption from applicability of the aforesaid company which
provision has been provided in the following derives directly or
situations indirectly its
o Where the transferor along with its substantial value from
related parties does not hold (i) the right the assets located in
of control or management; (ii) the voting India shall be deemed
power or share capital or interest to be situated in India.
exceeding 5 per cent of the total voting Section 47(vicc) of the
power or total share capital in the Act provides
foreign company or total interest in the exemption only if the
entity directly holding the Indian assets shares of foreign
(Holding Co). company derive
o In case where the Indian assets are not substantial value from
directly held, then if the transferor along shares of an Indian
with related parties does not hold (i) the company. While the
right of management or control in intent may be to
relation to such foreign company or the exempt all cases of
entity; and (ii) any rights in such foreign demerger where
company which would entitle it to either foreign company
exercise control or management of the derives substantial
holding company or entitle it to voting value from assets
power exceeding 5 per cent in the located in India, the
holding company. reading of Section
47(vicc) of the Act
· The Finance Act, 2015 has introduced indicates that the said
Section 47(vicc) in the Act which, subject to exemption would be
fulfillment of certain conditions provides that available only in cases
transfer of shares of a foreign company where the shares of
(which directly or indirectly derives its value the foreign company
substantially from shares of an Indian derive substantial
company) by the demerged foreign company value from shares of
to the resulting foreign company under a Indian company. Due
scheme of demerger will not be regarded as to this inconsistency
transfer. in the language of
Section 47(vicc) vis-à-
· The Indian entity will be required to furnish vis Explanation 5 to
information relating to indirect transfers. The Section 9(1)(i), transfer
same has also been notified. In case of any of shares of a foreign
failure, the Indian company will be liable for company which
derives its value
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Sr. No Section Issue/Justification Suggestion
a penalty of INR 5 lakhs or 2 per cent of the predominantly from
value of the transaction as specified. assets located in India
(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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amendment should be
made in the respective
provisions of the Act.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
120. 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 The Finance Act, 2017 provided that the aforesaid back of shares held
avoidance of deeming provisions shall not apply to an asset or indirectly through
double taxation capital asset mentioned in Explanation 5 of specified funds (FPIs
section 9(1)(i), which is held by a non-resident by registered as Category -I
in case of such
way of investment, directly or indirectly, in a or Category II), in
indirect transfer
Foreign Institutional Investor as referred to in respect of other offshore
provisions, funds the indirect
clause (a) of the Explanation to section 115AD
where direct transfer provisions may
and registered as Category-I or Category-II
transfer has still lead to double
foreign portfolio investor under the Securities and
already been Exchange Board of India (Foreign Portfolio taxation
subject to tax Investors) Regulations, 2014 made under the
Securities and Exchange Board of India Act, Therefore, a suitable
1992. amendment should be
brought in to the effect
The Finance Act, 2017 exempted investors (direct that exemption is
/ indirect) in category I (sovereign funds) and extended to all offshore
category II (broad-based funds) FPIs from the funds (interalia Category-
application of indirect transfer tax provisions. III FPIs) and should not
The CBDT has, recently, issued a Circular No. be restricted to specified
28/2017 dated 7 November 2017 clarifying that funds.
the indirect transfer provisions shall not apply to (SUGGESTION FOR
income arising to a non-resident on redemption or RATIONALIZATION OF
THE PROVISIONS OF
buy-back of shares held indirectly through
DIRECT TAX LAWS)
specified funds, if such income is consequent to
transfer of shares held in India by the specified
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
Pre-Budget Memorandum 2020 (Direct Taxes and International Taxation) Page 165
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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.
121. 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
"royalty".
(i) The proposition that "right to use a copyright" (SUGGESTION FOR
is different from "right to use a copyrighted REDUCING/MINIMIZING
article" is recognized and it is only the `right to LITIGATIONS)
use a copyright' which is covered within the
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
purposes of Central Excise Law by the CBEC,
which is another wing of the Ministry of
Finance. These facts lead to the conclusion that
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`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
The Apex Court in CIT Vs. Kotak Securities Apex Court in CIT Vs.
Limited has clarified that the common services Kotak Securities Limited
which are necessary for carrying out trading in an exception should be
securities for which transaction charges are carved out in
paid, do not amount to technical services. Explanation 6 to Section
9(1)(vi) so as to exclude
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
Circular No. 13/2006, dated 13.12.2006 made to Section 194J to
issued by the CBDT states that TDS shall be exclude sale of software
applicable only when there is a `contract for products from the ambit
work' and not where there is a `contract for of tax withholding. In
sale'. This proposition has also been upheld this regard, it is
in various judicial precedents like BDA suggested that the
Limited vs. ITO (TDS) 281 ITR 99 (HC Bom), following provision be
CIT vs. Dabur India Limited (283 ITR 197) included in Section 194J
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(HC Del). of the Act:
Considering the facts and arguments above, it Amendment required
is clear that transaction of sale of "194J. (1) Any person, ...
`Packaged/Canned Software' is a `contract for Provided that no
sale' as against a "contract for work' and deduction shall be made
consequently, should not attract TDS under this section --
provisions. It is relevant to note that
1. ...
`Packaged/Canned Software' is also subject
to excise duty. There are no other goods in 2. ...
India which are subject to both excise duty from any sums, if
and TDS. credited or paid for
An amendment to the Income-tax Act to the transfer of a
exclude `Packaged/Canned Software' from computer software
the purview of `royalty' would automaticall y (including the
exclude the transactions from the purview of granting of a
Section 194J of the Income-tax Act and would licence), along with
help resolve the withholding tax issue faced or without a
computer or
by traders of hardware with embossed
computer-based
software. The distribution network and
equipment or for
channel partners for off the shelf packaged
ancillary services
software also deal with hardware like
such as up
computers, desktop etc. The packaged
gradation or
software is mostly sold along with the
subscriptions,
hardware, on the same invoice. There is no
which does not
obligation of TDS on any hardware items, and involve transfer of
the traders are finding it confusing and difficult all or any rights in
to discharge the TDS obligation arising out of respect of any
the sale of the `Packaged Software/Canned copyright."
Software'. Resolution of the definition of
royalty to exclude `Packaged
Software/Canned Software' would also help (SUGGESTION FOR
traders and boost ease of business. RATIONALIZATION
OF THE
Separately, Software Ancillary Services such as
PROVISIONS OF
Upgrade Fees, Subscriptions, etc. which do not
DIRECT TAX LAWS)
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. 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
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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.
122. 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.
· In a bid to fuel the
· Finance Act 2012 also brought in another highly competitive
retrospective amendment to the definition of Telecom Industry as
the term `Royalty' by introducing Explanation well as to bring in
6 to Sec 9(1)(vi) thereby enlarging the scope
clarity, the Government
of the term `process' to include transmission
by satellite, cable, optical fiber or by any should clarify that
other similar technology, whether or not such Explanations 5 and 6
process is secret. should not be
interpreted in a way to
· The above amendments could be interpreted bring payments,
to bring within its ambit, payments made by whether made to
Telcos to other domestic operators for domestic operators or
services like interconnect, roaming, etc. Tax international operators,
withholding on such payments would result in for standardized
significant cash flow issues for Telcos. telecom services
including basic/ mobile
Rationale telephony, internet,
roaming, interconnect,
· As regards payments made to non-resident etc. under the ambit of
operators, a position may be taken that since definition of `Royalty'.
the term `process' has not been defined in the
treaty, meaning of the same can be imported (SUGGESTION FOR
from domestic tax law for interpreting RATIONALIZATION OF
provisions of the tax treaty [relying on Article THE PROVISIONS OF
3(2) of treaty read with section 90 and 90A of DIRECT TAX LAWS)
the Act]. The above would result in payments
being made to foreign operators located in
treaty countries also subject to tax
withholding in India.
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· 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.
123. 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
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
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(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
benefit of the same is
not available to the
foreign satellite
provider in its country,
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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)
124. 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 date of transfer of the
to in sub-clause (i), by fifteen per cent. shares of the foreign
[EMPHASIS PROVIDED] company and the Indian
capital gains tax thereon
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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
However, this provision is attracted even where Indian asset or shares at
there is no such intention. The definition of low value prior to the
specified date being the date of the end of the date of transfer of the
latest accounting period prior to the date of shares of the foreign
transaction of transfer of the shares of the foreign company is unlikely to
company, particularly poses a problem. happen. Hence this risk
is avoided.
A Multinational company, which is reorganising or
restructuring its global business may be doing so
(ii) The value
for a number of reasons, least of which may be
contributed by the Indian
connected with Indian taxation. Hence, even
asset to the foreign
where such foreign company has already sold off
company has reduced by
its Indian subsidiary (or asset) separately to a
more than 15% between
third-party buyer just before transferring its own
the specified date and
shares, it may still be liable to this indirect
the date of transfer of the
taxation because on the specified date it owned
shares of the foreign
the Indian company (or asset).
company,
This provision is anomalous and results in double
(SUGGESTION FOR
taxation in this situation since post the specified
date, when the Indian asset is sold, the foreign
RATIONALIZATION OF
company would have paid its capital gains tax in THE PROVISIONS OF
India. Yet, because such Indian asset was on its DIRECT TAX LAWS)
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.
125. Definition of · SEP was introduced to tax non-resident Considering the intent to
Significant entities conducting business through digital tax digital business carried
Economic medium. out by non-resident entities
Presence (SEP) · However, definition of SEP is not clear that it in India, the definition of
for the purpose is applicable only to non-resident entities SEP should be amended to
of business conducting business through digital medium. restrict its applicability to
connection business carried through
digital medium.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
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DIRECT TAX LAWS)
126. 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)
127. 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)
128. 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
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RATIONALIZATION OF THE
PROVISIONS OF DIRECT
TAX LAWS)
129. 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
REDUCE / MINIMIZE
LITIGATIONS)
130. 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
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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%.
131. 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
Post an outbound merger, the assets, liabilities such condition is that a
and employees of the amalgamating Indian foreign company can
company may continue to physically exist in India. acquire and hold only
This may create a PE exposure for the certain assets in India
amalgamated foreign company. In that event, which are permitted under
business profits attributable to the foreign the relevant FEMA
amalgamated company's PE in India will be liable regulations for the
to tax at the rate of 40% (plus applicable acquisition of property in
surcharge and cess). India.
Such cross-border mergers
would not be attractive till
the time there exists tax
liability or ambiguity
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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)
· 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
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The Institute of Chartered Accountants of India
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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.
(SUGGESTION FOR
REMOVAL OF
ADMINISTRATIVE AND
PROCEDURAL
DIFFICULTIES RELATING
TO DIRECT TAXES)
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132. 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
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
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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 180 standardized 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
(Organization 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
180standardized approach to transfer pricing
documentation. India has Implemented these
suggestions by inserting first proviso to section
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.
133. 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
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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.
134. 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
Still after several cases been disposed by the RATIONALIZATION OF
High Court and the Appellate Tribunals, there is THE PROVISIONS OF
no clear resolution to this issue and it is still one DIRECT TAX LAWS)
of the most litigated TP issues before the courts.
135. 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
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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)
136. 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 Globally, arm's length range is the Inter quartile the globally accepted
range (25th to 75th percentile of the dataset). This is inter quartile range of
practiced in most of the countries, for eg. US, 25th to 75th percentile of
Canada, UK, etc. the dataset.
· 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
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Sr. No Section Issue/Justification Suggestion
THE PROVISIONS OF
DIRECT TAX LAWS)
137. 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
used as an alternative
In case where the arithmetic mean is adopted to where range concept is
compute the arm's length price (as an alternative to inapplicable. Allowing
adopting the identified range as introduced in higher tolerance band
Finance (No 2) Act 2014), limiting the tolerance will provide better
band to 3 percent (1 percent for wholesalers) is flexibility.
extremely restrictive.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
138. 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)
139. 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
· Suo moto by the taxpayer in the return of to the specific
income; requirements from the
· By the AO during assessment proceedings, taxpayers on this front.
and has been accepted by the taxpayer; (SUGGESTION FOR
· Adjustment determined by an Advance RATIONALIZATION OF
Pricing Agreement (APA) entered into by the THE PROVISIONS OF
taxpayer; DIRECT TAX LAWS)
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· 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
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.
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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
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
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The Institute of Chartered Accountants of India
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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) 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)
(iv) 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.
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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
the AE is a holding company.
(v) 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)
(vi) 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)
(vii) 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
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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
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.
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(viii) 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
to file modified return of income in respect of
RATIONALIZATION OF
covered past years.
THE PROVISIONS OF
DIRECT TAX LAWS)
140. 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
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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)
141. 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
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 Thus, it is recommended
and in respect of which APA has been reached. 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
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cancellation of the entire
APA.
(SUGGESTION FOR
REDUCING/MINIMIZING
LITIGATIONS)
142. 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
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.
143. 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.
144. 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
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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
Excess interest shall mean total interest infrastructural development
paid/payable by the taxpayer in excess of thirty and maturity.
per cent of cash profits or earnings before (SUGGESTION FOR
interest, taxes, depreciation and amortisation RATIONALIZATION OF
(EBITDA) or interest paid or payable to AEs for THE PROVISIONS OF
that previous year, whichever is less. DIRECT TAX LAWS)
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.
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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 exc essive 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
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)
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(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
In respect of explicit guarantees, the transaction commission (if any) paid by
relating to associated enterprises is only towards the Indian entity to the
a 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 Further, the word implicit
wherein the rate and terms are decided purely guarantee may be dropped
through negotiation. Hence, restriction of benefit from the provisions. The
in relation to guarantees ought to be only to the term `explicit guarantee'
extent of the guarantee commission (if any) may also be appropriately
claimed as a deduction by the Indian entity and defined to obviate future
not interest paid to the third-party lender. litigation on this front.
Further, including implicit guarantees under the (SUGGESTION FOR
above restrictions would lead to significant RATIONALIZATION OF
hardship for the taxpayers and may result in THE PROVISIONS OF
protracted litigation in the coming years. It is DIRECT TAX LAWS)
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 conside ration' 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
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purposes of thin-
capitalisation rules
based on the definition
of the term `debt'.
· 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)
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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
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.
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· It may further be
clarified that set off
will be available even
if the section is not
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
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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):
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
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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
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
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simply an undertaking is provided by one AE to a RATIONALIZATION OF
lender or a bank, the tax authorities may contest that THE PROVISIONS OF
guarantee exists, without going into details whether DIRECT TAX LAWS)
the same has benefited the borrower and whether
the AE has actually rendered any service or
assumed any liability.
(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.
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145. 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
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
(b) Section 144BA,
only investments, Finance Bill, 2015, investments made up to
providing for reference to
but may extend to 31.03.2017 are to be protected from the
Principal Commissioner or
all transactions applicability of GAAR by amendment in the
Commissioner in certain
upto 31.03.2017 relevant rules in this regard. Accordingly, Rule
cases, be consequently
10U has been appropriately amended, and all
deferred by two years and
investments made before 1.4.2017 are protected
made applicable with effect
from the applicability of GAAR.
from A.Y.2018-19.
However, all transactions entered before (SUGGESTION FOR
01.04.2017, and not only investments made, RATIONALIZATION OF
need to be protected from the applicability of THE PROVISIONS OF
GAAR, so as to further improve the investment DIRECT TAX LAWS)
climate in the country
(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.
146. 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 purpose'
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
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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;
· 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
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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.
An ambiguity arises as to how tax benefit is
purposes of the
conditioned at income / loss level. This may also threshold shall include
defeat the objective of INR 3 crore tax benefit only income tax, dividend
threshold as provided in Rule 10U of the Income-tax distribution tax and profit
Rules, 1962 (the Rules). distribution tax, and shall
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
recommendations1, in cases of tax deferral, the only
benefit to the taxpayer is not paying taxes in one year (SUGGESTION FOR
but paying it in a later year. Overall there may not be RATIONALIZATION OF
any tax benefit but the benefit is in terms of the THE PROVISIONS OF
present value of money. DIRECT TAX LAWS)
Further, as observed by the Expert Committee2, 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
1
Page 48 and 49 of the Final Report by the Expert Committee on GAAR chaired by Dr. Parthasarathi Shome.
2
Page 47 of the Final Report by the Expert Committee on GAARchaired by Dr. Parthasarathi Shome.
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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
India with a clarity on the
domestic tax laws prevalent
in the country.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
147. 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
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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.
148. 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.
149.
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
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· 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 (SUGGESTION FOR
in the nature of Royalty, Fees for Technical RATIONALIZATION OF
Services and payment in case of transfer of THE PROVISIONS OF
Capital Asset. DIRECT TAX LAWS)
· There may be instances where the foreign
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.
150. 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
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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
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:
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· Final assessment order/
final demand notice of the
tax authority of the foreign
country
· 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)
151. 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
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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
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.
152. 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
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The Institute of Chartered Accountants of India
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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
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
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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%.
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.
153. 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
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of this Article.
As per ICDS, Interest shall accrue on the time
basis determined by the amount outstanding and
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
154. 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
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in order to determine whether a non-resident has
a withholding obligation in India under Section
195 of the Act.
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
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prescribed. responsible for paying"
However, consequential amendment has not been means
made in section 204(iii), defining "person
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
Further, in section 204, the "person responsible under the provisions of
for paying" has been defined for the purposes of the Act, the payer
the foregoing provisions of Chapter XVII and himself or if the payer
section 285. Since section 285 is in respect of is a company, the
submission of statement by a non-resident having company itself
liaison office, the definition of "person responsible including the principal
for paying" given in section 204 is not relevant in officer thereof.'
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
A penalty of Rs. 1 lakh is leviable under section relates to a transaction not
271-I for failure to furnish information or for chargeable to tax.
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
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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
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.
f) Applicability of Remittance
under Liberalised Remittances Capital account
Rule 37BB read Scheme of RBI transactions should be
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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
As per Section 5 of the FEMA, any person may Act.
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.
(SUGGESTION FOR
RATIONALIZATION OF
THE PROVISIONS OF
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DIRECT TAX LAWS)
155. 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)
156. 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
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
Recently, CBDT has notified Rule 37BC which withheld taxes and reported
has retrospective provides that if the non-resident payee furnishes in Form 15CA/CB.
effect certain information and documents like TRC or
Unique Identification number in his home country, Additionally, the non-
s.206AA shall not apply to specified payments viz. residents shall also be
interest, royalty, FTS and capital gains. relieved from filing Form
This is a welcome relief to the taxpayers and 3CEB and maintaining
considerably improves ease of doing business transfer pricing document in
with non-residents by obviating the need to obtain case of transactions with
PAN for non-residents. associated enterprises on
which appropriate TDS has
However, the requirement of filing returns by such been deducted.
non-residents still continues (except for interest (SUGGESTION FOR
payments covered by s.115A(1)(a)) and without RATIONALIZATION OF THE
PAN, it is also possible to file return. PROVISIONS OF DIRECT
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Thus, the position which presently exists is that TAX LAWS)
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
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)
157. 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
In majority cases, the NRI's are not able to file for RATIONALIZATION OF
refunds due to small amount as the cost of filing is THE PROVISIONS OF
more than deduction. DIRECT TAX LAWS)
158. 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
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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
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)
159. 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
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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
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.
160. 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
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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
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
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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
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.
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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
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
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161. 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
such an arrangement would
not trigger a creation of PE
for the foreign enterprise in
India.
(SUGGESTION FOR
IMPROVING TAX
COLLECTION)
162. 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
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case of the recipient, he may make an application should be taken into
to the Assessing officer to determine by general account by the Assessing
or special order, the appropriate portion of sum so officers while issuing
chargeable. Further section 195(3) gives the certificate of lower
recipient an option to make an application to deduction of tax at source
Assessing Officer for the grant of certificate or no deduction under
authorizing him to receive any sum without section 195 and 197.
deduction of tax at source, subject to the rules (SUGGESTION FOR
notified in this regard. Making an application to RATIONALIZATION OF
the Assessing officer and follow ups thereafter THE PROVISIONS OF
leads to administrative hassles. DIRECT TAX LAWS)
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
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.
163. 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)
164. 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
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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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