The recently appointed Finance Minister of India, Mr. P. Chidambaram, handed with the task to give an upward thrust to the ailing Indian economy, delivered the Union Budget 2013-2014 – his first in the second consecutive term of the UPA Government, on the 28th February 2013, and thereafter presented the Finance Bill, 2012 before the Parliament.
As an annual event, accordingly, we have hereby attempted to elucidate and analyze the major and important amendments proposed in the Direct Tax and Service Tax Laws, with their implications; and are sure that the same would be handy to you.
As of date, these are proposals only and if adopted by the Parliament and passed as Finance Act; will come into force for and from Assessment Year 2014-2015 relevant to Financial Year 2013-14, unless specifically provided otherwise.
The key highlights of this Budget are that there are minimal amendments proposed (he didn’t have many options though) and importantly there are not many cats falling off the cupboard in the fine print (he would better do that after the last year’s experience of the global hullabaloo on various controversial provisions brought in by the then Finance Minster).
I. DIRECT TAXES
Amendments proposed under the Income-tax Act, 1961 (hereafter referred to as “the Act”) and Wealth-tax Act, 1957 (specifically referred wherever applicable)
1. Direct Tax Code (‘DTC’)
In his Budget four years ago, the then Finance Minister announced the introduction of the Direct Taxes Code (‘DTC’) and a draft of the same was also circulated for comments and discussion. Thereafter, there have been revisions and variations therein based on inputs from various lobbies.
Since last two years, the then Finance Minister had been communicating its introduction from the ensuing financial year, but the same did not happen. The result is effectively the same even in this year. However, the only ray of hope is the mention by the Finance Minster in his Budget Speech, to work with the Standing Committee on the report submitted by it and to table the Bill before the end of this Budget Session. We abstain ourselves from forecasting its course, as we have not succeeded at it in the past; let it come when it actually does!
2. Rates of Taxes, Basic Exemption Limit and Income Slabs unaltered, Surcharges increased, additional tax credit upto Rs.2,000/- to individuals with income upto Rs.5,00,000/-
Income thresholds, basic tax rates and Education Cess
The rates of Basic Tax, Education Cess and Higher Secondary Education Cess (Education Cess and Higher Secondary Education Cess collectively referred to as ‘Education Cess’), as well as the Basic Exemption Limits and the income slabs, have been kept unaltered for all assessees.
The applicable Basic Exemption and Income Slabs as well as basic tax rates, though unchanged, are given in the below Table for your ready reference:
Basic exemption and
|All Individuals, HUF, AOP and BOI (except those stated below)||
Rs.2,00,001/- to Rs.5,00,000/-
10% of income above Rs.2,00,000/-
Rs.5,00,001/- to Rs.10,00,000/-
Rs.30,000/- plus 20% of income above Rs.5,00,000/-
Rs.1,30,000/- plus 30% of income above Rs.10,00,000/-
Individuals, being resident, and ‘Senior Citizen’ (i.e. above 60 years) upto the age of 80 years
Rs.2,50,001/- to Rs.5,00,000/-
10% of income above Rs.2,50,000/-
Rs.5,00,001/- to Rs.10,00,000/-
Rs.25,000/- plus 20% of income above Rs.5,00,000/-
Rs.1,25,000/- plus 30% of income above Rs.10,00,000/-
Individuals, being resident, and ‘ Very Senior Citizen’ i.e. of age 80 years and above
Rs.5,00,001/- to Rs.10,00,000/-
20% of income above Rs.5,00,000/-
Rs.1,00,000/- plus 30% of income above Rs.10,00,000/-
Tax Credit upto Rs.2,000/- to resident individuals with taxable income upto Rs.5 lacs
However, through the proposed new section 87A, a tax credit of upto Rs.2,000/- (subject to maximum of tax payable) would be allowed to resident individuals having taxable income upto Rs.5 lacs.
Increase in Surcharges (for one year only as stated in Speech)
A surcharge of 10% of tax (dubbed as super-rich tax) is proposed to be levied on all non-company assessees (viz. Individuals, HUFs, AOPs, BOIs, firms etc.) with income exceeding Rs. 1 crore. However, marginal relief shall be allowed to ensure that the additional tax and surcharge payable on excess of income over Rs.1 crore is limited to the amount by which the income exceed Rs.1 crore.
Further, currently, domestic companies and foreign companies having taxable income above Rs.1 crore (including uner MAT provisions), are liable to a surcharge of 5% and 2% of tax respectively. While that continues for such companies having taxable income of upto Rs.10 crores (including MAT provisions), it is now proposed to levy a surcharge of 10% on domestic companies and 5% on foreign companies, with taxable income exceeding Rs.10 crores (with marginal relief as stated in the preceding paragraph).
This creates a situation where companies with taxable income of more than Rs. 1 crore (but less than Rs.10 crores) would an tax at an effective rate of 32.445% (considering 5% surcharge and 3% Education Cess), while the non-company assessees with taxable income above Rs.1 crore would pay tax at a higher effective rate of 33.99% (including Surcharge of 10% and Education Cess of 3%).
Similarly, surcharge @ 10% of the amount of tax is also proposed to be levied on dividend/income distribution by companies (section 115-O), mutual funds (section 115-R), securitization trust to its investors (proposed new section 115TA, discussed herein below) as well as on amount paid by unlisted domestic company to its shareholders by way of buy-back of shares (proposed new section 115QA discussed herein below).
The good news, however, is that the Finance Minster has stated that the above increases shall only be for a year i.e. Financial Year 2013-14. However, chances are always there that it could be continued in ensuing years quoting some reason or other.
3. Reduction in Securities Transaction Tax (‘STT’) Rates
The STT rates are proposed to be reduced as under effective from 1st June 2013:
- On sale of equity futures – from 0.017% to 0.01% (payable by seller as hitherto);
- On sale of unit of an equity oriented fund to the mutual fund (redemption at fund counters) – from 0.25 to 0.01 % (payable by seller);
- On sale of unit of equity oriented fund through recognized stock exchange, settled by delivery or actual transfer of units – from 0.1% to 0.001% (payable only by seller, as against current levy on both seller and purchaser)
4. Commodities Transaction Tax (‘CTT’)
The Finance Minister has proposed to levy CTT in a limited way, on non-agricultural commodities’ future contracts traded on recognized commodity exchanges, @ 0.01% of transaction value (on same lines as for equity futures) payable by the seller only.
Detailed provisions are also proposed for collection of CTT by exchanges, its payment to government, filing returns, interest/penalties on non/delayed compliances etc.
The Finance Minister has clarified in his speech that trading in commodity derivatives will not be considered as a speculative transaction (per the existing provisions of section 43(5)).
Also, clause (xiv) is proposed to be included in section 36(1) so as to allow the entire CTT as deduction where the corresponding commodity derivative transactions form part of the business of the assessee.
While the intention from the Finance Minister’s Speech was clear that he does not want to allow deduction of CTT if the same forms part of ‘Capital Gains’ (whether derivatives transactions can form part of ‘capital gains’ is a different debate), similar provisions on lines that specifically disallow STT against ‘Capital Gains’ have not been proposed for CTT, in section 48. Therefore, unless those denying provisions are included, it could be argued that CTT is allowable even against ‘Capital Gains’ as ‘expenditure incurred wholly and exclusively in connection with transfer’.
5. Rationalization and Postponement of much hyped and despised General Anti-Avoidance Rules (‘GAAR’)
There would be hardly anyone ignorant about the introduction of GAAR by the then Finance Minister in the last year, the subsequent global uproar, especially by the developed nations, and the consequential relenting by the Finance Minster in its extent and time of application.
Amendments are accordingly proposed in Chapter X-A containing the main GAAR provisions, as well as various other sections having related or consequential applicability; to postpone its application from 1st April 2015 i.e. Financial Year 2015-16.
Yes, you read it right, April 2015 onwards. While there have been reports throughout that the provisions have been postponed to 2016, the fine print states that these shall come into force from 1st April 2016 (except at couple of places where there is a typographical error stating 2015, which shall eventually be corrected) and in technical parlance, when a provision is stated to be effective from 1st day of April of any year, then that should be read as the Assessment Year starting from that date. Hence, 1st April 2016 technically means Assessment Year commencing from that date i.e. Assessment Year 2016-17 which is Financial Year 2015-16, which starts from 1st April 2015. This has also been clearly stated in the Memorandum explaining the amendments, that forms part of the Budget Documents.
The following are the important /modifications proposed in GAAR provisions (in line with report of Shome Committee):
- An arrangement, the main purpose of which is to obtain a tax benefit, to be considered as an impermissible avoidance arrangement attracting GAAR, as against the current provisions prescribing ‘the main purpose or one of the main purposes’;
- Two separate definitions in the current provisions, namely, ‘associated person’ and ‘connected person’ are proposed to be combined into one inclusive provision defining ‘connected person’;
- The Approving Panel proposed to be consisting of a Chairperson who is or has been a Judge of a High Court, one Member of the Indian Revenue Service not below the rank of Chief Commissioner of Income-tax and one Member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices; as against the current provisions that the Approving Panel shall consist of not less than three members being income-tax authorities or officers of the Indian Legal Service;
- The factors like; period of time for which the arrangement had existed, the fact of payment of taxes by the assessee and the fact that an exit route was provided by the arrangement; would be relevant but not sufficient to determine whether the arrangement is an impermissible avoidance arrangement;
- The directions issued by the Approving Panel shall be binding on the assessee as well as the tax authorities, and no appeal shall lie against its order. The current provisions that it shall be binding only on the tax authorities are proposed to be modified accordingly.
- It is proposed that an arrangement shall be deemed to be lacking commercial substance, amongst other situation in existing provisions, also in a case where it does not have a significant effect upon business risks or net cash flow of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained but for application of GAAR provisions;
The following recommendations of the Shome Committee, accepted in the Press Release issued by the Finance Ministry Statement issued by the Finance Minister Finance Ministry, do not find place in the proposed amendments; however, they were recommended to be brought in the guidelines by way of Rules, and therefore are expected to find place in the Income-tax Rules, through separate notification(s):
- Investments made before August 30, 2010 (date of introduction of the Direct Taxes Code, Bill, 2010) to be grandfathered;
- Detailed reasoning to be given in the show cause notice, containing reasons, to the assessee before invoking the provisions of Chapter X-A, and the assessee to have an opportunity to prove that the arrangement is not an impermissible avoidance arrangement.
- While determining whether an arrangement is an impermissible avoidance arrangement, to ensure that the same income is not taxed twice in the hands of the same tax payer in the same year or in different assessment years;
- A monetary threshold of Rs. 3 crore of tax benefits in the concerned arrangement in order to attract the provisions of GAAR, to be provided;
- Where only a part of the arrangement is an impermissible avoidance arrangement, GAAR to be restricted to the tax consequence of that part which is impermissible and not to the whole arrangement;
- Where GAAR and Specific Anti Avoidance Rules (‘SAAR’) are both in force, only one of them will apply to a given case, and guidelines to be issued regarding the applicability of one or the other;
The following important amendment that was to be brought per the above Press Release, and which can be implemented only through amendment in the Act, and therefore, should have been part of the Finance Bill, is missing therein:
- GAAR to not apply to such FIIs that choose not to take any benefit under any DTAA and to non-resident investors in FIIs.
6. Section 2 (1A) defining ‘agricultural income’, also prescribes the location of land which shall be considered as ‘agricultural land’.
Amendments are proposed to aerially measure the distance of such land from nearest municipality or cantonment board, as against the current provisions of measurement by ground. Also, to determine the population of such place, it is proposed to consider the last preceding census of which the relevant figures have been published before the first day of the concerned previous year.
Similar amendments are also proposed in the Wealth-tax Act, 1957.
7. Section 10 (10D) exempts from tax any sum received under a life insurance policy, where the annual premium does not exceed 10 % of the actual capital sum assured (for policies issued on or after 1st April 2012).
It is now proposed to amend these provisions so as to provide such exemption on annual premium upto 15% on policies issued on or after 1st April 2013 on life of person with disability/severe disability (per section 80U) or suffering from specified disease or ailment (per section 80DDB).
Corresponding amendments are also proposed in section 80C so as not to withdraw the deduction thereof to cases covered by the preceding paragraph.
8. Plugging the loophole in taxing the proceeds received under the Keyman Insurance Policy
As stated above, section 10(10D) exempts from tax sum received under a life insurance policy; however proceeds received under a keyman insurance policy is not so exempt.
However, there has been rampant tax-planning whereby policies taken as keyman insurance policy were assigned to the keyman before maturity and the keyman would pay remaining premium and claim the sum received as exempt on the ground that the policy is no longer keyman insurance policy.
To plug the above loophole, it is proposed to amend the said section so as to provide that a keyman insurance policy assigned to any person during its term, with or without consideration shall continue to be treated as keyman insurance policy and thus its proceeds not exempt from tax.
9. Taxation of Securitization Trusts
Per section 161, if a trust’s income consists of profits and gains from business, then the same is taxable at maximum marginal rate.
These posed genuine hardship to special purpose securitization trusts formed under the relevant provisions of SEBI/RBI, as there was no specific provision exempting their income.
It is now proposed to enact section 10(33DA) to exempt income of such trusts from activity of securitization.
Further, Chapter XII-EA containing sections 115TA to 115TC are proposed to be introduced so as to provide an additional tax on income distributed by the securitization trust to its investors, @ 25% in cases if individuals and HUFs and 30% in other cases (plus surcharge @ 10% and Education Cess @ 3%), which shall then be exempt in hands of such investor (per newly proposed section 10(35A)). It is also proposed that such tax on distributed income shall not be payable if such income is received by a person who is exempt from tax under the Act.
Other provisions related to delay in payment of tax on distributed income are also provided for.
10. Exemption to income of Investor Protection Fund of Depository
Under the concerned SEBI Regulations, depositories are mandatorily required to set up an Investor Protection Fund.
A new section 10(23ED) is proposed to be included so as to exempt from tax the contribution received by such fund (formed in accordance with the concerned SEBI regulations) from a depository.
It is also proposed to tax the amount shared by such fund with a depository in the year in which it is so shared.
11. Retrospective amendment granting pass through status to certain Alternative Investment Funds
Currently, section 10(23FB) exempts the income of a Venture Capital Company (‘VCC’) or a Venture Capital Fund (‘VCF’) earned from investment in Venture Capital Undertaking (‘VCU’). Also, section 115U grants a pass through status to VCC and VCF in respect of income earned from investment in VCU i.e. such income shall be taxed in the hands of investor and not the VCC or VCF.
The SEBI (Alternative Investment Funds) Regulations, 2012 have replaced the SEBI (Venture Capital Fund) Regulations, 1996, effective May 2012.
It is accordingly, proposed to extend the benefit of exemption to the VCC and VCF set up under Alternative Investment Fund (‘AIF’) regime, on its income from investment in VCU, retrospectively from Assessment Year 2013-14 (i.e. Financial Year 2012-13)
In the context of AIF, a VCC and VCF are defined as company or trust that has been granted a certificate of registrations sub-category of Category I AIF and satisfies the following conditions:
- At least two-thirds of its investible funds are invested in unlisted equity shares or equity linked instruments of VCU;
- No investment has been made by such AIF in a VCU in which its trustee or settler holds (individually or in aggregate) more than 15% of the paid-up equity share capital;
- The units or shares of the AIF are not listed on any recognized stock exchange
The existing provisions of section 115U would grant the pass through even to entities in AIF regimes.
12. Please stop those tax-free/low tax buy-back of shares
The distribution of income by unlisted companies in form of buy-back shares (and not by way of dividend) and saving enormous tax in certain cases, caught the eye of the finance ministry, and came Mr. Finance Minister with his tongs.
It is proposed to introduce Chapter XII-DA containing sections 115QA to 115QC, to levy an additional tax on domestic unlisted company, of 20% (plus 10% surcharge and 3% Education Cess) on ‘distributed income’ to its shareholder by way of buy back of its shares.
‘Distributed income’ has been defined to mean the consideration paid by the company on buy-back as reduced by the amount which was received by the company for issue of such shares.
There is a huge anomaly in the above definition to the effect that the reduction would be only of the amount that the company has originally received in respect of the shares bought back; thus ignoring the subsequent transfer(s) that would have taken place from one shareholder to another.
For example, say the shareholder who is receiving the buy-back proceeds from a company had bought those shares from an erstwhile shareholder (and not from the company) at, say Rs.100/-, whereas the company had issued such shares to the erstwhile shareholder at Rs. 10/-; then for the purpose of computing ‘distributed income’ for the purpose of levy of Buy-back Distribution Tax (‘BDT’) as above, the amount that would be reduced from buy-back consideration would only be Rs.10/- and not Rs.100/- (which such shareholder would get deduction of under the existing provisions of capital gains or business taxation). Thus such shareholder tends to lose hugely on account of the above anomaly, which needs to be removed.
Other provisions related to payment of such additional tax to government (within 14 days of payment of buy-back consideration), interest on delay in payment thereof etc. have also been proposed.
The receipt of the amount by the shareholder would be exempt from tax per the proposed section 10(34A).
While this would surely plug the cases that it intends to, it would also take within its net, all the other cases which did not intend any sort of tax planning, the implications whereof would be as under:
- In case where the transfer of shares under buy-back would be short term capital gains in the hands of shareholder under existing provisions; (assuming such tax payer falls in the higher tax bracket of 30%, having income of less than Rs.1 crore) the above proposed provisions would tend to be beneficial as the effective rate of tax now would be only 22.6% (including surcharge and education cess);
- In case where the transfer of shares under buy back would be long term capital gains in the hands of shareholder per the existing provisions, the proposed provisions would be disadvantageous since the reduction of tax on account benefit of indexation would be lost and also the surcharge on the above proposed tax of 10% payable by the company conducting buy-back would be levied from the first penny (in case of shareholder, the surcharge would come into play only on income above Rs.1 crore).
- In case where the transfer of shares under buy-back entails a loss, then though the BDT too would not be payable, the carry forward of loss that the shareholder is entitled to under the current regime of capital gains or business taxation would be unavailable, creating another major disadvantage.
- The anomaly in the definition of ‘distributed income’ can be a huge blow for taxpayers in the situations explained hereinabove.
Moreover, the above provisions would also cover cases of buy-back made out of capital (and not accumulated profits), since there has been no distinction made therein; but that does not make any major difference to genuine cases as stated in the preceding paragraph, as it just shifts the burden of tax from the shareholder to the company, the cost-benefit aspect of which has been dealt with in the preceding paragraph.
However, for cases which these provisions intend to plug, tax under the above proposed provisions on buy-back out of capital would be a big blow, especially where the shareholder is exempted from capital gains under the existing provisions ( example, a Mauritian company). However, there would be hardly any cases of payment out of capital in such category of assessees.
13. It is proposed to insert section 10(49) to exempt income of National Financial Holdings Company Limited (which is succeeded by the erstwhile The Specified Undertaking of Unit Trust of India (SUUTI)), from Assessment Year 2014-15 onwards.
14. Investment Allowance of 15% for acquisition and installation of new plant and machinery by manufacturing company
A new section 32AC is proposed to be introduced so as to allow to a company engaged in the business of manufacture or production of any article or thing, an allowance of 15% of the actual cost, if exceeds Rs.100 crores, of new plant and machinery acquired and installed between 1st April 2013 to 31st March 2015; subject to fulfillment of the other conditions therein.
15. Clarification regarding extent of allowance of bad debts in case of banks
To do away with certain interpretational issues relating to the amount allowable as deduction to banks on account of bad debts u/s.36 (1)(vii), after reducing the provision for bad and doubtful debts allowed as deduction under a different sub-clause (viia); it is proposed to provide for an amendment to the effect that the allowance of bad debts would be the amount actually written off as reduced by the amount lying in the credit of provision for bad and doubtful debts without any distinction between urban and rural advances.
16. Disallowance of certain fee, charge etc. incurred by State Government Undertakings
It is proposed to insert section 40(iib) so as to disallow any royalty, license fee, service fee etc. levied on any state government undertaking by the State Government.
17. Taxability of income from sale of immoveable property based on stamp duty valuation extended to business transactions
Currently, section 50C provides that where a capital asset (liable to tax as ‘Capital Gains’) being land or building or both, is transferred, then the higher of stamp duty valuation or the agreement value shall be considered as full value of consideration (subject to other provisions therein) and tax shall be levied accordingly.
It is now proposed to introduce section 43CA so as to extend similar provisions i.e. taxability based on higher of stamp duty or agreement value, to transactions of transfer of land or building or both even to business assets (as in case of real estate builders, developers etc.). Other provisions in line with those in section 50C are also proposed.
It is also proposed that where the date of agreement and date of registration are not the same, then the stamp duty valuation may be taken on date of agreement and not transfer in such cases where the amount of consideration or part thereof has been received by any mode other than cash on or before the date of agreement.
18. Taxing the recipient individual or HUF of an immoveable property for inadequate consideration
Section 56(1)(vii) taxes receipts by Individuals or HUFs, without consideration or at consideration less than the fair value. However, the receipt of any immoveable property is taxable only if its received without consideration (from non-relatives), and not if it is received for a consideration lesser than the fair value. The logic behind this, as we understand, is that the seller thereof would pay the tax based on stamp duty valuation u/s.50C, if that’s higher than the agreement value (and now even under the newly proposed section 43 CA as discussed above)
It is now proposed to amend the provisions so as to provide that where the immoveable property is received for an inadequate consideration (i.e. he difference between stamp duty valuation and transactions value is more than Rs.50,000/-), then such difference shall be taxable in the hands of the recipient individual or HUF as Income from Other Sources.
It is also proposed that where the date of agreement and date of registration are not the same, then the stamp duty valuation may be taken on date of agreement and not transfer in such cases where the amount of consideration or part thereof has been received by any mode other than cash on or before the date of agreement.
Now, this, in our view is illogical and harsh, and would make two people pay tax on the same transaction. If the seller has transferred immoveable property at inadequate consideration having regard to stamp duty valuation, then she would pay tax based on stamp duty valuation u/s.50C (or proposed section 43CA). Now, on the other side, even the buyer is made to pay tax on the stamp duty valuation! Some mind needs to be applied here!
19. Expanding the scope and eligibility of u/s. 80CCG
Section 80CCG currently allows deduction to a resident individual with gross total income upto Rs. 10 lacs, being a new investor, who acquires specified listed shares in accordance with notified scheme (Rajiv Gandhi Equity Savings Scheme), of 50% of such investment or Rs.25,000/-, whichever is lower.
It is now proposed to extend the benefit to investment in listed units of an equity oriented fund, and allow the deduction for 3 consecutive years beginning with the year of investment. Also, eligibility limit of gross total income upto Rs.10 lacs has been upped to Rs.12 lacs.
20. Extension of deduction u/s.80D to contributions to notified schemes
Section 80D allows deduction, inter alia, in respect of mediclaim premium as well as contribution to Central Government Health Schemes, subject to fulfillment of other conditions therein.
It is now proposed to extend the benefit of the deduction thereunder to contributions to such other schemes of Central and State governments as may be notified by Central Government.
21. Additional deduction of interest on housing loan of upto Rs.1 lac to first time home buyers
Section 80EE is proposed to be enacted so as to allow to an individual, a deduction of upto Rs. 1 lac in respect of loan taken from a financial institution (banking company or housing finance company) of upto Rs.25 lacs between 1st April 2013 and 31st March 2014 to acquire a residential property valued upto Rs. 40 lacs, provided she does not own any residential house property as on the date of sanction of loan.
It is also proposed that if the deduction entire of Rs. 1 lac as above could not be claimed in Financial Year 2013-14, then the balance can be claimed in Financial Year 2014-15.
It may be noted that the above deduction is over and above the existing entitlement of housing loan interest deduction of Rs.1.5 lacs. However, while the existing deduction of upto Rs.1.5 lacs can be of interest on housing loan taken from anyone, the aforesaid deduction can be allowed only on housing loan taken from financial institution.
22. Section 80G, which allows deduction in respect of donations, @ 100% in respect of certain funds and @ 50% for rest, subject to other conditions therein; is proposed to be amended so as to allow 100% deduction in respect of donations to the National Children’s Fund (which was hitherto entitled for 50% deduction).
23. Sections 80 GGB and 80 GGC allow deduction respectively to company and non-company assessees, of contributions given to a political party or electoral trsut.
It is proposed to amend these sections so as not to allow deductions of amounts contributed in cash.
24. Section 80IA provides for deduction of 100% of the profits and gains from various businesses specified therein, subject to fulfillment of other conditions prescribed.
The said section allows such deduction, inter alia, to the undertakings set up for generation/distribution/transmission of power before 31st March 2013.
It is now proposed to extend the benefit of this deduction to such undertakings set up before 31st March 2014.
25. Rationalization of section 80JJAA allowing deduction for additional wages to new regular workmen
Section 80JJAA provides that domestic companies shall be entitled to deduction for 3 years, of an amount of 30% of additional wages paid to new regular workmen (as defined therein) engaged in its industrial undertaking, , subject to other conditions therein.
While this incentive was intended for employment of blue collared employees in manufacturing sector, it is being claimed for other employees in other sectors also. To plug the same, amendments are proposed so as to provide that the deduction shall be available to new regular workmen employed in factory manufacturing goods (as against industrial undertaking), subject to fulfillment of other conditions therein.
26. Tax Residency Certificate (‘TRC’) mandatory but not sufficient to claim DTAA relief
Last year, sections 90 and 90 A were amended to provide that the benefit of the DTAA shall not be allowed to any non-resident unless he/it obtains a certificate from the government of the country of its/his residence of he/it being resident of that country.
It is now proposed to further amend these sections retrospectively from Assessment Year 2013-14, so as to provide that the TRC is necessary but not sufficient condition for claiming relief under DTAA.
While this seem to have created havoc in international investors’ fraternity, as it could have implications on Mauritian companies taking shelter of TRC, based on Circular 789 of the CBDT and the Supreme Court’s decision in the case of Azadi Bachao Andolan; we do not think that was the intention and expect a clarification from the Finance Ministry to that effect.
27. Increase in tax rates on income from royalty and fees for technical services of non-residents
Section 115A, inter alia, provides for a tax rate of 10% on royalty and fees for technical services earned by a non-resident or a foreign company from Indian government/entity, subject to fulfillment of other conditions therein.
It is proposed to increase this tax rate from existing 10% to 25%.
28. Extension of concessional rate of tax on dividend from foreign subsidiary to one more year, and removal of cascading effect thereon
Section 115BBD provides for concessional rate of tax at 15% on dividend income of by Indian companies from foreign companies in which they hold atleast 26% equity stake, upto Financial Year 2012-13.
It is proposed to extend this benefit for Financial Year 2013-14 also.
Further, section 115-O relating to Dividend Distribution Tax (DDT) provides for removal of cascading effect thereof in respect of dividends received from Indian subsidiaries, by allowing the same as reduction from the amount of dividend distributed by the shareholder company in a multi-tier structure.
It is now proposed to remove such cascading effect in respect of dividend received from foreign subsidiaries too, where the tax has been paid by the Indian company receiving dividend, under the aforesaid section 115BBD.
29. Increase in rate of tax on Mutual Fund Income Distribution in case of Individuals and HUFs
Section 115R provides for a rate of tax of 12.5% on income distributed by mutual funds, other than a money market mutual fund or a liquid fund, to an individual or HUF.
It is now proposed to increase this rate to 25% effective from 1st June 2013, to bring it in line with the rates applicable to such assessees in case of money market mutual funds and liquid funds.
30. Rationalization of rate of tax on income distributed by Infrastructure Debt Fund (‘IDF’) operating as a Mutual Fund
In case of an IDF set up as a Non-Banking Finance Company (‘NBFC’) the interest payment made by the fund to a non-resident investor is taxable at a concessional rate of 5%, per provisions of section 115A(1)(iiaa). However in case of distribution of income by an IDF set up as a Mutual Fund the distribution tax is levied at the higher rates u/s.115R.
In order to bring parity in taxation of income from investment made by a non-resident Investor in an IDF whether set up as NBFC or MF, it is proposed to amend section 115R to provide for tax @ 5% on income distributed by a Mutual Fund under an IDF scheme to a non-resident Investor.
31. Application of seized assets in search cases
The existing provisions of section 132B, inter alia, provide that seized assets may be adjusted against any existing liability under the Act or Wealth-tax Act, or other direct taxes statutes and the amount of liability determined on completion of assessments pursuant to search, including penalty levied or interest payable.
Various courts have taken a view that the term ‘existing liability’ includes advance tax liability of the assessee.
To do away with such interpretation, it is proposed to amend the aforesaid section so as to clarify that the existing liability does not include advance tax payable.
Luckily, these provisions would apply from 1st June, 2013, rather than the retrospective bombarding.
32. Return of Income file without payment of Self Assessment Tax to be considered as defective return
The existing provisions of section 139 (9) provide that where the Assessing Officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within 15 days. If the defect is not rectified within the time allowed by the Assessing Officer, the return is treated as an invalid return.
Further, section 140A provides that where any tax is payable on the basis of any return (Self Assessment Tax), , the assessee shall be liable to pay such tax together with interest payable.
It is stated by the finance ministry that a large number of assessees have been filing their returns of income without payment of Self Assessment Tax.
It is, therefore, proposed to amend section 139(9) to provide that the return of income shall be regarded as defective unless the tax together with interest, if any, payable in accordance with the provisions of section 140A has been paid on or before the date of furnishing of the return.
It must be noted here that the way the amendment is worded, if the return is considered as defective for non-payment of Self Assessment Tax before the due date of filing return, then such defect cannot be cured and the return would eventually turn invalid. Therefore, it must be ensured that the Self Assessment Tax is paid before filing the Return.
This amendment will take effect from 1st June, 2013.
33. Expansion of the provisions of Special Audit u/s.142(2A) entailing lesser work for Assessing Officers and more for professionals
The existing provisions of section 142 (2A), inter alia, provide that if at any stage of the proceeding, the Assessing Officer having regard to the nature and complexity of the accounts and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the approval of the Chief Commissioner or Commissioner, direct the assessee to get his accounts audited by an accountant and to furnish a report of such audit.
The expression ‘nature and complexity of the accounts’ has been interpreted in a very restrictive manner by various courts.
It is, therefore, proposed to amend the aforesaid section so as to cover situation involving ‘volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity’.
Some relief for Assessing Officers and opportunities for professionals!
This amendment will take effect from 1st June, 2013.
34. Sections 153 and 153B (for search assessments) provide for period of limitations for assessments and reassessments.
It is proposed to amend the said sections, effective from 1st June 2013, so as to exclude in counting such period of limitation, the time from which the direction given by the Assessing Officer for special audit u/s.142 (2A) is challenged in the court by the assessee and the order of the court setting aside such direction is received.
35. Clarification of the phrase ‘tax due’ for the purposes of recovery in certain cases
Section 179 provides that where tax due from a private company cannot be recovered from such company, then the director (who was the director of such company during the previous year to which non-recovery relates) shall be jointly and severally liable for payment of such tax unless he proves that the non-recovery of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part.
Some courts have interpreted the phrase ‘tax due’ does not include penalty, interest and other sum payable under the Act.
In view of the above, it is proposed to clarify that for the purposes of this section, the expression ‘tax due’ includes penalty, interest or any other sum payable under the Act.
Amendment on the similar lines for clarifying the expression ‘tax due’ is proposed to be made to the provisions of section 167C, which is applicable in case of a Limited Liability Partnership (‘LLP’).
These amendments have also been proposed from 1st June, 2013, keeping away the ghost of retrospective application.
36. Tax Deduction at Source on transaction of immoveable property with resident
It is proposed to introduce a new section 194 IA so as to provide that a purchaser of any immoveable property (other than agricultural land) from a resident, shall be obliged to deduct tax at source @ 1% of the amount of consideration payable therefor, where the consideration is Rs.50 lacs or more.
It may be noted that the requirement of tax deduction at source as above is applicable to all assessees including individuals, HUFs etc. (whether or not they are subjected to tax audit), where the above conditions are fulfilled.
37. Concessional rate of tax on interest in case of certain rupee denominated long-term infrastructure bonds
The existing provisions of section 115(1) (iiaa) and 194LC provide that if an Indian company borrows money in foreign currency from a source outside India either under a loan agreement or by way of issue of long-term infrastructure bonds, as approved by the Central Government, then the interest payment to a non-resident person would be subject to a concessional rate of tax @ 5% and withholding of tax shall be done at that rate.
In order to facilitate subscription by a non-resident in the long term infrastructure bonds issued by an Indian company in India (rupee denominated bond), it is proposed to amend section 194LC so as to provide that where a non-resident deposits foreign currency in a designated bank account and such money as converted in rupees is utilised for subscription to a long-term infrastructure bond issue of an Indian company, then, the borrowing by the company shall be deemed to be in foreign currency and the benefit of reduced rate of tax would be available to such non-resident in respect of the interest income arising on such subscription subject to other conditions provided in the section.
The designated bank account should be solely for the purpose of deposit of money in foreign currency and such money is to be used, after conversion, for subscription to a rupee denominated long-term infrastructure bond issue of an Indian company.
This amendment will take effect from 1st June, 2013.
38. Section 271FA, providing for penalty for non-filing or delay in filing of Annual Information Report (‘AIR’) of Rs. 100/- per day.
It is now proposed to amend the said section so as to provide for a penalty of Rs.500/- per day in respect of continuing failure beyond the time limit allowed in the notice requiring filing of such AIR.
39. Under the Wealth-tax Act, 1957 amendments are proposed to facilitate electronic filing of annexure-less return of net wealth.
II. INDIRECT TAXES – SERVICE TAX:
Unlike the last budget, wherein significant amendments in the Service tax laws were proposed, of which switch over to the concept of negative list based taxation was the major one; this time around the Finance Minister has rather not meddled much and tried to bring in more stability to the new regime of taxation of services by adopting carrot and stick approach to strengthen the enforcement mechanism by handing out more powers to his tax officials to go after evaders on one hand ,and keeping the industry happy by leaving the Indirect taxes rates unchanged. These are discussed with the respective proposed amendments herein below.
1. Rate of Service Tax:
Standing by his statement then in August, the Finance Minister has not only left the basic rates of Customs and Excise duties unchanged but also continued to tax services at the current rate of 12% (as well as Education Cess of 3% thereon) with a view to bring in stability in the Service tax regime. More so, having regard to the constraints Indian economy is going through including the battle against inflation and achieving the desired growth with inclusive development; there was hardly any room for raising the tax rates.
Thus, the effective rate of Service Tax would remain unchanged @12.36%.
2. Service tax Voluntary Compliance Encouragement Scheme, 2013 – One time breather:
To encourage voluntary compliance and to broaden the tax base, it is proposed to provide a one-time amnesty by way of waiver of interest, penalty and immunity from prosecution to persons who may not have filed returns or filed returns (not disclosing true liability) for the period October 2007 to December 2012, if these persons opt for the Service tax Voluntary Compliance Encouragement Scheme, 2013 (“the Scheme”), pay the tax due as provided in the Scheme and comply with the other conditions mentioned therein, the details of which proposed to be inserted by way of a new Chapter i.e. Chapter VI of the Finance Act, 1194.
This is a welcome move and could provide one-time boost to the Government revenues and may result in speedy settlement of outstanding disputes.
3. Recovery mechanism further strengthened:
Section 73(1) of the Finance Act, 1994 gives powers to the Central Excise Officer for recovery of short/ unpaid Service tax upto 18 months.
Further, the proviso to Section 73(1) allows the Officer to invoke extended period of limitation and travel back upto 5 years from the relevant date in case of fraud, collusion, willful mis-statement, suppression of facts or any other contravention with intent to evade payment of tax.
Therefore, in majority of cases where demands were raised, the Department alleged suppression of facts, and invoked extended period of limitation of 5 years. This has caused undue hardships to the Assessees.
On appeal against such Orders, the Tribunals and Courts have held that in case suppression of facts etc. is not established and the matter does not warrant invocation of the extended period, the Show Cause Notice itself is invalid and the resultant proceedings based on such notice are void. Thus, in such instances, the entire demand stands cancelled.
Therefore, in order to avoid loss of revenue to the Government in such cases, the Finance Minister following the suit of the Excise law, has proposed to insert a new Section 73(2A), to provide for a deeming fiction that such notice will be deemed to be notice issued under Section 73(1) covering the normal period of limitation of 18 months.
Consequently, demand relating to past period of at least 18 months would still survive even if suppression of facts etc. is not proved.
This will result in additional revenue to the Government which was hitherto lost in case suppression of facts etc. was not established.
4. Penalty also cast on Director, Manager, Secretary etc. for specified contraventions:
To curb unethical practices and unlawful transactions by companies, the Finance Minister in addition to the already existing penal provisions, has gone a step ahead by inserting a new Section 78A which provides for personal liability of the Director, Manager, Secretary or other officer which may extend up to Rs.1lac if such person was knowingly concerned in case of the following contraventions:
a) evasion of service tax; or
b) issuance of invoice, bill or, as the case may be, a challan without provision of taxable service in violation of the rules made under the provisions of this Chapter; or
c) availment and utilization of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules made under the provisions of this Chapter; or
d) failure to pay any amount collected as service tax to the credit of the Central Government beyond a period of six months from the date on which such payment becomes due.
5. Maximum penalty for failure to obtain registration:
The Finance Minister has provided a cap on the maximum penalty that can be imposed for failure to obtain registration, which hitherto was based on per day basis for the period of delay subject to minimum of Rs.10,000/-.
This penalty has now been rationalized and henceforth the maximum penalty for such default would be restricted to Rs.10,000/- irrespective of the actual period of delay.
6. Parity in admitting appeal or filing cross-objections after the due date:
Hitherto, only Departmental appeals or objections raised by the Department were allowed to be admitted after the expiry of the due date. This being prejudicial to the interest of the Assessees, the Finance Minister following the principles of fairness and equity in tax administration, has proposed to amend Section 86(5) of the Finance Act, 1994 to include even Assessee appeal to be filed after the due on showing sufficient cause.
This is a welcome measure which will boost confidence and trust in tax administration, amongst the large body of taxpayers who are tottering to keep pace with the numerous ambiguities and grey areas under the Service tax law.
7. Power to arrest – Now one can be arrested even by an Excise Officer!
To further strengthen the enforcement of the Service tax law, and to act as deterrent for non-compliers, the Finance Minister has even brought into the legislative books, a new Section 91, which empowers Commissioner of Central Excise to authorize specified officer to arrest a person for certain offences including non-payment of collected Service tax.
Such power to arrest any person was hitherto not provided in the Finance Act, 1994.
Proviso to Section 73(1) of the Act states that in case of short levy, non-levy, short payment, non-payment or erroneous refund, the Officer may serve a notice on the Assessee within a period of 1year from the relevant date which has been defined in sub-section (6) of that section, to show cause why he should not be asked to pay the specified amount.
This time limit for issue of notice is proposed to be increased from 1year to 18 months from the relevant date, so as to strengthen the enforcement mechanism of the Act, check leakage of Revenue and deter others from engaging in such types of malpractices.
Further, a new sub-section (1A) is inserted, which stipulates that follow-on notices issued on the same grounds need not repeat the grounds but only state the amount of Service tax chargeable for the subsequent period. Such Statement of tax due for the subsequent period, served on the Assessee with reference to the earlier demand notice, will be deemed as a notice under section 73(1) of the Act.
8. Increased term of imprisonment on specified offences:
Section 89(1) which provides for the specified offences which are punishable with imprisonment and the term therefor is proposed to be amended as under:
- Where the amount under consideration exceeds Rs.50 lacs and the offence is one of the following:
- Evading payment of tax knowingly; or
- Availment and utilization of CENVAT credit without actual receiving the service; or
- Maintainence or supply of false books of account, information etc. of failure to submit information required by the law;
the imprisonment shall be for minimum term of 6 months which may extend to 3 years unless the court records reasons for a lesser period.
- In case the amount under consideration exceeds Rs.50 lacs and offence pertains to failure to pay amounts collected as Service tax beyond 6 months from the due date; then imprisonment shall be for minimum term of 6 months which may extend to 7 years, unless the court records reasons justifying a lesser period.
- In all the above offences, where the amount involved is less than Rs.50 lacs , the maximum imprisonment shall be for a term of 1 year.
Further, sub-Section (2) of Section 89, which provides for imprisonment term in case of second and every subsequent offence, is proposed to be amended as under:
Where the amount involved exceeds Rs.50 lacs, and the offence pertains to failure to pay amounts collected as Service tax beyond 6 months from the due date, then the imprisonment for second and every subsequent time may extend to 7 years.
In other cases, where the offence is repeated, the imprisonment may extend to a term of 3years.
Thus the enforcement mechanism is proposed to be tightened further to ensure proper compliance of the law.
9. Expansion in the scope of Negative List:
With the onset of Negative List based taxation of services being implemented from the last year’s Budget, this new concept has widened the tax base significantly by bringing into the tax net many untapped sectors and has stepped up the fiscal revenues from the services sector of India.
However, keeping in view policy requirements, international practices and socio-economic factors playing an important role in the development of the country, the following further services are proposed to be included in the Negative List i.e. not liable to Service tax:
- vocational courses offered by institutes affiliated to the State Council of Vocational Training;
- processes on which duties of Excise are leviable under Medicinal and Toilet Preparations (Excise Duties) Act, 1955;
- all testing activities in relation to agricultural produce.
10. Threshold Limit of Exemption:
The current Threshold Limit of exemption for small service providers is proposed to be continued at Rs.10 lacs per year.
11. Review of Exemptions:
The Finance Minister has proposed to rationalize the following exemptions:
- Charitable organizations:
So far charitable organizations registered under Section 12AA of the Income tax Act, 1961 were exempt from payment of Service tax in respect of the activities of advancement of any other object of general public utility upto the value of Rs.25 lacs per year.
However, effective from 1st April 2013, even such charitable organizations would be covered by the threshold exemption of Rs.10 lacs per year.
Hitherto, restaurants serving food and beverages were exempted from payment of Service tax, on the condition that it does not have facility of air-conditioning or air-heating and does not have license to serve alcoholic beverages.
Realizing that the distinction as regards ‘license to serve liquor’ was artificial, with effect from 1st April, 2013 Service tax will be leviable on taxable service provided in restaurants with air-conditioning or central air heating in any part of the establishment at any time during the year.
- Transport of goods by road, rail or vessel (nothing has been specified as to the nature of amendment proposed as yet)
12. Withdrawal of Exemptions:
The following exemptions are proposed to be withdrawn, effective from 1st April 2013:
- Services provided by an educational institution by way of renting of immovable property.
- Temporary transfer or permitting the use or enjoyment of a copyright relating to cinematographic films. So far, this service was fully exempt. However, from 1st April 2013 onwards, the exemption will be restricted to exhibition of cinematograph films in a cinema hall or a cinema theatre.
- Services by way of vehicle parking to general public.
- Services provided to Government, a Local Authority or a Governmental Authority, by way of repair or maintenance of aircraft.
13. Special Exemption for service provided by Indian Railways:
Section 99 is proposed to be inserted to provide retrospective exemption to the Indian Railways on the Service tax leviable on various taxable services provided by them during the period prior to the 1st day of July 2012, to the extent show cause notices have been issued upto the 28th day of February 2013.
14. Rationalization of Abatement on Construction services:
Currently, the taxable service of construction which is a declared service under clause (b) of Section 66E of the Finance Act, 1994 is eligible for an abatement of 75% from the value, provided the value of land is included gross amount charged to the buyer.
Thus, the taxable portion of construction service is restricted to 25% of the value.
However, with a view to rationalize this abatement scheme, it is proposed to reduce the abatement to 70% of the value in case of high-end constructions where the carpet area of home/ flat is 2,000 sq.ft. or more or the amount charged to the buyer is Rs.1 crore or more. Therefore, in such cases the taxable portion of service would be 30% of value. In all other cases the taxable portion of service would continue to be 25% of the value.
This change will come into effect from the 1st March, 2013.
15. Advance Ruling Parity in admitting appeal or filing cross-objections after the due date:
It is proposed to extend the scope of advance ruling to resident public limited companies as well, which was hitherto not available. A Notification to this effect would be issued separately.
16. No clear road map for Goods and Services Tax (‘GST’):
The Finance Minister in his Speech last year had given a clear indication of roll – out of GST on the cards in the immediate future considering the introduction of Negative List approach coupled with other amendments including a statement that ‘Goods and Services Tax Network(GSTN) will become operational by August 2012’.
In his Speech this year, though the Finance Minister has proposed to set-apart a sum of Rs.9,000 crores as Central Sales Tax compensation for the states, and urged them to help the centre in roll-out of GST, he did not announce a road map for implementation thereof, as the support of the states is very critical for these ambitious reforms.
More so, he did not announce a deadline as was expected, and also did not effect any changes in the Indirect tax reforms that suggest a progress towards GST in the short term.
B. S. Shah & Co., Chartered Accountant
Bhupendra Shah, B.Com., L.L.B. (SP.), A.C.S., F.C.A.
Hiten Paurana, B.Com., F.C.A.
N. Krishnakumar, B.Com., F.C.A., Grad CWA
Shreyam Shah, B.Com. A.C.A.,DISA