As per nature’s law, human memory is conditioned to understand and memorise those things, faster and better, which eyes see and ears hear and the same is applicable on announcements of budget amendments also. Most often, the amendments which are covered in the budget speech of the Finance Minister garner all the lime-light of TV channels and news-paper headlines and the resultant focus and attention of general public at large and in the process some very crucial and significant nuances of budget amendments get remain unnoticed.
In the Finance (No. 2) Bill, 2019 also, some major and significant amendments as covered in the budget speech of Hon’ble Finance Minister Smt. Nirmala Sitharaman concerning increase in the threshold turnover limit of domestic companies from Rs. 250 crores to Rs. 400 crores, for the eligibility of reduced corporate tax rate of 25%, incentives to start-ups including dispensing of angel tax, deduction of up to Rs. 1.5 lakhs on interest on loans for purchase of electric vehicles, additional deduction of up to Rs. 1.5 lakhs for interest on loans for acquisition of affordable houses valued up to 45 lakhs, interchangeability of PAN & Adhaar, increase in surcharge rates of super rich, deduction of TDS @ 2% on cash withdrawals of above Rs. 1 crore, pre-filling of ITRs and faceless e-assessments etc., have attracted all the hype, attention and limelight whereas several other important and crucial budgetary amendments not covered in the budget speech and even the nuances and deeper implications of the amendments covered in the budget speech, have somehow remained unnoticed and less talked about by the general public at large and even tax professionals.
“Beauty & Devil Both Lie in the Details.”
In this write-up, I am trying to decode these lesser talked about ‘Nuances and Deeper Implications’ of the proposed amendments in Finance (No. 2) Bill, 2019, in continuation to my earlier write-up titled ‘Decoding Union Budget 2019-20’, published on 6.7.2019, as under:
(i) Practical & Deeper Implications of Pre-filled ITRs & Enlarging the Scope of Statement of Financial Transactions (SFTs) :
The Hon’ble Finance Minister in her budget speech, has presented the provision of pre-filled ITRs as a taxpayer friendly initiative, and has stated as under,
“Pre-filled tax returns will be made available to taxpayers which will contain details of salary income, capital gains from securities, bank interests, and dividends etc. and tax deductions. Information regarding these incomes will be collected from the concerned sources such as Banks, Stock exchanges, mutual funds, EPFO, State Registration Departments etc. This will not only significantly reduce the time taken to file a tax return, but will also ensure accuracy of reporting of income and taxes.”
Existing provisions of section 285BA of the Act, inter alia, provide for furnishing of statement of financial transaction (SFT) or reportable account by person specified therein.
In order to enable pre-filling of return of income, it has been proposed to obtain information by widening the scope of furnishing of statement of financial transactions by mandating furnishing of statement by certain prescribed persons other than those who are currently furnishing the same. It has also been proposed to remove the current threshold of rupees fifty thousand on aggregate value of transactions during a financial year, for furnishing of information, with a view to ensure pre-filling of information relating to small amount of transactions as well.
At present, the pre-filling of columns in ITRs is limited to certain basic details only like address, email id, jurisdictional AO details etc. and not to details of salary income, capital gains from securities, bank interests, and dividends etc. and tax deductions, as has now been proposed.
No doubt the legislative intent of introducing the above provision is to assist and facilitate the taxpayers only, but the practical considerations of the same also need to be looked into and taken care of, by the Legislature.
The automated reflection of pre-filled credit of TDS in online Form 26AS was also introduced as a taxpayer friendly initiative, in order to facilitate the taxpayers in obtaining the seamless credit of TDS deducted on their income. However, it is not hidden from anyone now that instead of helping and facilitating the taxpayers, this provision has infact become a headache, in some cases, where inspite of deduction and deposition of applicable TDS, the credit of TDS is not being reflected in online Form 26AS, due to some technical glitches in the IT system of department or on account of errors being committed by the TDS deductors in filing corresponding TDS Returns, and then the deductees have to run from pillar to post to obtain their otherwise fully lawful credit of TDS.
In the same manner, the accurate and timely reflection of pre-filled details of salary income, capital gains from securities, bank interests, and dividends etc. and tax deductions in ITRs of taxpayers will primarily depend upon the accuracy and timeliness of the filing of corresponding annual information returns (SFTs) by concerned institutions such as Banks, Stock exchanges, Mutual Funds, EPFO, State Registration Departments etc., for which taxpayers would not have any control. So even any unintentional error or discrepancy in filing SFTs, on the part of such institutions, will result in incorrect reflection of the corresponding pre-filled details in the ITRs of the taxpayers.
“Mystification is simple; clarity is the hardest thing of all.” – Julian Barnes
Thus, suitable clarifications and appropriate provisions and arrangements should be made in the IT system concerning pre-filled ITRs, to enable the taxpayers to manually fill their respective income and deduction details in their ITRs, in case of any deviation or discrepancy between the actual figures and the pre-filled figures.
In all its fairness to the concerned law-maker authorities, it is essential to mention here that in order to ensure proper compliance on the part of such institutions, it has been proposed to amend the provisions of section 285BA(4) of the Act, so as provide that in case of any defect in the SFT, if the same is not rectified within the time specified therein, the provisions of the Act shall apply as if such person had furnished inaccurate information in the statement.
Consequently, it has also been proposed to amend the penalty provisions contained in section 271FAA so as to ensure correct furnishing of information in the SFT and widening the scope of penalty to cover all the reporting entities under section 285BA .
But, practically how effectively and efficiently, this amended provision concerning the pre-filled ITRs, will work, only time will tell.
These amendments will take effect from 1st day of September, 2019.
(ii) Desirability of further Clarification on the Exact Modus Operandi of Functionality of Faceless e-assessments:
The Hon’ble Finance Minister, while emphasizing the significance and desirability of faceless e-assessments, in her budget speech has stated as under,
“The existing system of scrutiny assessments in the Income-tax Department involves a high level of personal interaction between the taxpayer and the Department, which leads to certain undesirable practices on the part of tax officials. To eliminate such instances, and to give shape to the vision of the Hon’ble Prime Minister, a scheme of faceless assessment in electronic mode involving no human interface is being launched this year in a phased manner. To start with, such e-assessments shall be carried out in cases requiring verification of certain specified transactions or discrepancies.
Cases selected for scrutiny shall be allocated to assessment units in a random manner and notices shall be issued electronically by a Central Cell, without disclosing the name, designation or location of the Assessing Officer. The Central Cell shall be the single point of contact between the taxpayer and the Department. This new scheme of assessment will represent a paradigm shift in the functioning of the Income Tax Department.”
No doubt the introduction of faceless e-assessments, is a very novel and path-breaking initiative of the Government and is aimed at putting a curb on undesirable practices on the part of tax officials.
However, in the context of present framework of complicated and subjective structure of income tax law in India, the practical feasibility and viability of the proposed faceless e-assessments is required to be assessed in a realistic sense and manner.
The concept of e-assessments has been introduced from AY 2016-17 onwards, wherein, the jurisdictional assessing officers are sending scrutiny notices u/s 143(2) of the Act, and scrutiny questionnaires u/s 142(1) of the Act, electronically, on the login portal of respective assesses and assesses are sending their responses along with the desired records and documents, electronically only via ITBA portal.
However, the practical results of such electronic e-assessments for the AY 2016-17, were not very encouraging, in view of several teething problems involving slow speed of the ITBA portal, space constraint and other technical issues in seamless receiving of scrutiny notices and uploading corresponding replies, by the assesses and most importantly the inability of such faceless e-assessments to effectively substitute the conventional yet effective mode of making understand and explaining the responses and replies of the scrutiny notices to the assessing authorities, via personal face to face interactions.
As a result, majority of the assessments for the AY 2016-17 were switched back to conventional manual mode.
Unfortunately it is a hard but true fact that in the wake of lack of appropriate supporting IT infrastructure and ground level teething problems especially on account of lack of desirable will and intent of the assessing authorities in suo-motto reading and going through the elaborate submissions of the assesses and understanding them in right earnest so as to undertake assessments on their merits, and also the lack of receptability of the assesses themselves towards this progressive change, and impracticability of such faceless e-assessments, the probability of making high pitched assessments involving huge additions and disallowances may increase considerably, thereby resulting in prolonged litigations and disputes.
“A lack of clarity could put the brakes on any journey to success.” – Steve Maraboli
Therefore, in order to make the proposed faceless e-assessments effective and assessee friendly, it is essential and crucial to issue appropriate clarifications with regard to the exact modus operandi of the functionality of such faceless e-assessments and take suitable measures and steps to overcome above bottlenecks and hurdles by way of ensuring the commensurate and supporting IT infrastructure to enable seamless and smooth data transfer, incorporating standardization in the conduct of assessments by assessing authorities by implementing Standard Operating Procedures (SOPs) to do away with the subjective-ness and arbitrariness in making additions and disallowances in assessments and fixing proper and effective accountability in cases of high pitched assessments.
(iii) Desirability of Suitable Clarification concerning the Effective Date of Applicability of the provision concerning Reduced Corporate Tax Rate of 25% on domestic companies having turnover of up to Rs. 400 crores.
The proposed amendment concerning the increase in threshold turnover limit from existing Rs. 250 crores to Rs. 400 crores, in case of domestic companies, for entitling them for a reduced corporate tax rate of 25%, has been done by way of making suitable amendment in Paragraph E of Part III of the First Schedule to the Finance Bill.
Explanatory Memorandum to Finance (No.2) Bill, in this regards, clarifies as under,
“The rates of income-tax in the case of companies have been specified in Paragraph E of Part III of the First Schedule to the Bill. In case of domestic company, the rate of income-tax shall be twenty five per cent of the total income, if its total turnover or gross receipts in the previous year 2017-18 does not exceed four hundred crore rupees, and in all other cases the rate of income-tax shall be thirty percent of the total income. In the case of company other than domestic company, the rates of tax are the same as those specified for the financial year 2018-19.”
The due date for filing ITRs by the domestic companies for the previous year 2017-18 corresponding to the AY 2018-19, has already elapsed and infact the domestic companies having turnover in the range of Rs. 250 to Rs. 400 crores in the previous year 2017-18, have already filed their ITRs at the applicable rate of 30%, based on the erstwhile threshold turnover limit of Rs. 250 crores. So, a suitable clarification in this regards has to be made to remove this anomaly.
Further, confusion and ambiguity will also arise in cases where the turnover of domestic companies in the previous year 2017-18 was in excess of Rs. 400 crores but got reduced to less than Rs. 400 crores in the FY 2018-19. In such cases, whether the benefit of reduced tax rate of 25% will be made available to such domestic companies or not, as the Explanatory Memorandum, only talks about applicable corporate tax rate of 25% on those domestic companies whose turnover in previous year 2017-18 was less than Rs. 400 crores and it does not talks about the previous year 2018-19.
“Clarity is the counterbalance of profound thoughts.” – Luc De Clapiers
So, a suitable clarification in this regards is desirable and warranted to remove any ambiguity or uncertainty.
(iv) Desirability of Suitable Clarification concerning the connotation of the expression ‘Expenditure’ for travel to a foreign country & payment of electricity bill, contained in amended provision of 7th proviso to section 139(1) of the Act, requiring the compulsory filing of ITR in cases of Individuals/HUFs/AOPs/BOIs undertaking high value transactions:
Currently, a person other than a company or a firm (hereinafter referred to as “specified assessee”) is required to furnish the return of income only if his total income exceeds the maximum amount not chargeable to tax, subject to certain exceptions. Therefore, a specified assessee entering into certain high value transactions is not necessarily required to furnish its return of income. In order to ensure that specified assesses who enter into certain high value transactions, do furnish their return of income, it has been proposed to amend section 139 of the Act so as to provide that the specified assesse shall be mandatorily required to file its return of income, if during the previous year, it :
(i) has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more current account maintained with a banking company or a co-operative bank; or
(ii) has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for himself or any other person for travel to a foreign country; or
(iii) has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards consumption of electricity; or
(iv) fulfils such other prescribed conditions, as may be prescribed.
Thus, the proposed amendment aims at widening and enlarging the ITR filing net by including in its scope those specified assesses (being Individuals/HUFs/Proprietary Concerns/AOPs/BOIs) also who have undertaken the specified high value transactions during the previous year namely, deposit of Rs. 1 crore or more in one or more current accounts, or have incurred expenditure exceeding two lakh rupees for themselves or any other person for travel to a foreign country or have incurred expenditure exceeding one lakh rupees towards consumption of electricity, even if their gross total income is below the exempted slab.
However, the usage of the expression “expenditure” in clause (ii) & (iii) of the amended 7th proviso in referring to the high value transaction of foreign travel or electricity consumption, has probably given rise to a confusion as to whether the mandatory filing of ITR in cases of such specified assesses will be attracted only if amount representing such high value transaction towards foreign travel or electricity consumption is being claimed as tax deductible business expenditure in their books of accounts, or the expression “expenditure” has been used in general parlance, so as to include the specified high value transactions of personal nature also, within its ambit.
The stipulation concerning deposits exceeding Rs. 1 crore in current account in clause (i) of amended 7th provison to section 139(1) of the Act, may also indicate that such high value transactions may have been referred in the context of business expenditure of the specified assesses and not on account of such transactions of personal nature.
“When the meaning is unclear there is no meaning.” – Marty Rubin
Therefore, in order to remove the above confusion and ambiguity, a suitable clarification is desirable by the concerned authorities.
(v) Desirability of Suitable Clarification concerning the inclusion of “Other Laws” the compliance of which has been proposed to be mandatory for Granting/Continuity of the Charitable Status of Charitable Trusts and Institution registered u/s 12AA of the Act:
Currently a few instances of misuse of the tax concessions and relaxations enjoyed by charitable trusts and institutions u/s 12AA of the Act, have come to the fore and infact there have been instances wherein, a few charitable trusts and institutions have been found indulged in money laundering and other unlawful pursuits.
Section 12AA of the Act prescribes for manner of grating registration in case of trust or institution for the purpose of availing exemption in respect of its income under section 11 of the Act, subject to conditions contained under sections 11, 12, 12AA and 13.
Section 12AA also provides for manner of cancellation of said registration. This section provides that cancellation of registration can be on two grounds:-
(a) the Principal Commissioner or the Commissioner is satisfied that activities of the exempt entity are not genuine or are not being carried out in accordance with its objects; and
(b) it is noticed that the activities of the exempt entity are being carried out in a manner that either whole or any part of its income would cease to be exempt .
In order to plug the loopholes in Law and to curb and restrict the indulgence in unlawful pursuits like money laundering etc. and to ensure that the trust or institution does not deviate from its objects, it has been proposed to amend section 12AA of the Income-tax Act, so as to provide that,-
(i) at the time of granting the registration to a trust or institution, the Principal Commissioner or the Commissioner shall, inter alia, also satisfy himself about the compliance of the trust or institution to requirements of any other law which is material for the purpose of achieving its objects;
(ii) where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A and subsequently it is noticed that the trust or institution has violated requirements of any other law which was material for the purpose of achieving its objects, and the order, direction or decree, by whatever name called, holding that such violation has occurred, has either not been disputed or has attained finality, the Principal Commissioner or Commissioner may, by an order in writing, cancel the registration of such trust or institution after affording a reasonable opportunity of being heard.
These amendments shall be effective from 1st September, 2019.
However, it has not been clarified yet as to the violation of compliance of which other laws will result in non-granting of approval of charitable status and/or cancellation of such approval granted earlier to such charitable trusts and institutions. In all likelihood, the Law being referred to here may be “Prevention of Money Laundering Act” or any such similar Laws aimed at curbing money laundering and conversion of black money into white money.
“It’s a lack of clarity that creates chaos and frustration. Those emotions are poison to any living goal.” – Steve Maraboli
Thus in order to remove any ambiguity or uncertainty, the concerned authorities must come out with suitable and timely clarification in this regards.
(vi) Tax on income distributed to shareholder on account of buyback in case of listed companies:
It is also desirable to discuss a lesser talked about yet an important and crucial amendment concerning the levy of additional income tax on buy back of listed shares by the companies, proposed in the Finance (No. 2) Bill, 2019.
Section 115QA of the Act provides for the levy of additional Income-tax at the rate of twenty per cent of the distributed income on account of buy-back of unlisted shares by the company. As additional income-tax has been levied at the level of company, the consequential income arising in the hands of shareholders has been exempted from tax under clause (34A) of section 10 of the Act.
This section was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends. This practice of widespread abuse was noted, in the past, amongst unlisted companies where the taxpayers preferred it for tax avoidance, as tax rate for capital gains was lower than the rate of Dividend Distribution Tax (DDT). However, instances of similar tax arbitrage have now come to notice in case of listed shares as well, whereby the listed companies are also indulging in such practice of resorting to buy-back of shares, instead of payment of dividends.
In order to curb such tax avoidance practice adopted by the listed companies, the existing anti abuse provision under Section 115QA of the Act, pertaining to buy-back of shares from shareholders by companies not listed on a recognised stock exchange, has been proposed to be extended to all companies including companies listed on recognised stock exchange. Thus, any buy back of shares from a shareholder by a company listed on recognised stock exchange, on or after 5th July 2019, shall also be covered by the provision of section 115QA of the Act. Accordingly, it has also been proposed to extend exemption under clause (34A) of section 10 of the Act to shareholders of the listed company on account of buy-back of shares on which additional income -tax has been paid by the company.
These amendments will take effect from 5th July, 2019.
“Seeking Clarity is seeking connection with the universe. To connect is to understand; to be clear is to be enlightened.” – Annie Zalezsak