POST UNION BUDGET 2018 MEMORANDUM Submitted to the Hon’ble Finance Minister, Union of India Through CBDT, INDIA By THE SOCIETY OF AUDITORS, CHENNAI in Feb, 2018
About ‘The Society of Auditors, Chennai’
The Society of Auditors, Chennai is an organization founded in the years 1932, long before the Institute of Chartered Accountants of India was established in 1949. Going strong at 85 plus, SOA is perhaps the oldest accounting body in the country. Several doyens in the profession of accountancy, audit and taxation have been and even now are actively associated with the Society. To name just a few, Sri D.Rangaswamy, former President of Hon’ble ITAT, Sri. N.Rangachary, former Chairman, CBDT and IRDAI, Sri P.Brahmayya, Padmashree Awardee Sri. T.N.Manoharan, Chairman, Canara Bank and Past President ICAI, Sri D.Rajaratnam, the former Chairman of Hon’ble ITAT etc. and several past presidents of ICAI were/ are actively associated with the Society of Auditors, Chennai, which disseminates professional knowledge to the members and students of this Chartered Accountancy profession of accountancy, management, attestation, taxation, information technology etc. by conducting seminars, workshops and conferences and also acts as a think tank in the fields.
The Hon’ble Finance Minister presented the Budget to the nation on the 1st February, 2018 and the Managing Committee of the Society thought it appropriate to conduct a brain storming session on the budgetary proposals, within the sub group formed for the purpose and to prepare a concise Post Budget Memorandum to be submitted to the Government, for its consideration and possible action.
It may kindly be appreciated that, while discussing the proposals and suggestions, the Society’s objectives were –
(a) balancing between augmentation of revenue and increasing tax payers’ confidence on the Government;
(b) ease of compliance for the tax payers:
(c) scope for lesser litigation; and
(d) emphasis on Hon’ble PM’s avowed theme – Minimum Government – maximum Governance – in that order.
1. Tax rates
1.1. Changes in the tax rates:
Tax Slabs of Senior Citizens and Very Senior Citizens can be merged and kept at Rs. 5,00,000/- and consequent to this change, changes in 80 D, 80 DDB and 80 TTB can be withdrawn. This will ensure a tremendous honours from the nation to all of those who are above 60 years, and win their whole hearted appreciation.
Tax rates for companies having turnover of 250 Crores or less in FY 16-17 will be 25 %.
It may be clarified that for corporates incorporated in FY 17-18, 25 % rate will apply
The present system of two tier Education cess can be replaced with a New single Cess called as Health and Education cess @ 4 % for all assesses.
2. Personal taxation
2.1 Standard Deduction’s come back for Salaried Class
With effect from AY 06-07, standard deduction u/s 16(1) was withdrawn to the salaried class which is now sought to be re-introduced from AY 2019-20. However, the proposed withdrawal of Transport allowance of Rs.1,600/- per month and deduction in respect of Medical facility of Rs.15,000 has made the net deduction to a mere Rs.5,800 from the taxable Income of a salaried employee. In terms of actual tax payable the benefit will be Rs.290 or Rs.1160 or Rs.1740, depending on the slab, as illustrated below: The impact gets further reduced on account of increase in the education cess to 4 %.
|a. Transportation allowance||Rs. 1,600 per month||(19,200)|
|b. Medical reimbursement||Rs. 15,000 p.a||(15,000)|
|Benefit provided||Standard deduction||40,000|
|Gain for assessee||In terms of income
In terms of TAX :-
a. 5% slab
b. 20% slab
c. 30% slab
It can be seen that at the lowest slab of Rs. 2.5 to Rs. 5 lakhs, the benefit translates to less than Rs. 25/- per month (not even the cost of a cup of tea in a normal restaurant) and that even at the highest slab (for a person who is having a taxable income pf Rs. 10 lakhs per annum), the tax benefit translates to less than Rs. 150/- per month. Among the salaried class of this country (perhaps the only class of honest tax payers), this has caused a lot of anger, indignation and hurt. That they formed a large section of the support base in 2014 elections cannot be forgotten and the Government should consider giving them appropriate relief, of course, without creating a large dent to the revenue augmentation process.
Our suggestion would be the following:
The Standard deduction can be increased to Rs.1,00,000 and exemptions u/s 10 (13A), 10(5) and Sec 10(14) can be withdrawn which will not only have a compensating effect for the Revenue but also reduce the paper work substantially
The provisions of Sec 193 has been amended to provide for deduction of TDS on 7.75 % Senior citizen bonds.
It is suggested to withdraw this amendment to provide ease of living to senior citizens
2.3 Stirring savings and get low cost funding for Infrastructure Projects:
Sec. 80 C limits have not been substantially raised for long. Government needs huge funds for infrastructure projects also. A scheme for Government Bonds at an interest of say 5% or so can be floated, redeemable after 6 years and every tax payer can be given a top (separate) limit of Rs. 1,00,000/- per annum to invest in such bonds u/s 80C. The tax payer’s net tax benefit will be a substantial Rs. 30,000/- p.a. Government can easily shore up a huge investment of not less than Rs. 2 lakh crores p.a, which will be a low cost funding source for the Government. In six years, the total amount that can be raised will be a minimum of Rs. 12 lakh crores. Post sixth year, the roll over can start and the repayment / redemption can be met out of moneys collected in that year.
3 . Capital Gains
3.1 Withdrawal of Exemption u/s 10 (38) and re-introduction of LTCG
The Hon’ble FM’s speech (para 155) mentioned that the major part of the LTCG accrued to corporates and LLPs. It further mentioned that it created a bias against manufacturing. This point was stressed in the Memorandum explaining the provisions of the Finance Bill, 2018 also. However, the re-introduction of LTCG by withdrawing the exemption u/s 10(38) for all the assessees has led to a palpable disconnect between the intent and content of the Budget.
Further the introduction of sec 112 A increases the complexities, paper work and Litigation Hence it is suggested (a) either to re-introduce LTCG tax and abolish STT completely or (b) increase the STT rate to augment the revenue. Second option is simple, effective and unlitigatable compared to the first and hence recommended.
Further, in respect of section 112A, the following suggestions are made to ensure that it does not adversely affect assessees who have acquired shares prior to 2004 and also who acquired the shares after 2004 by modes other than through purchase involving STT payment:
a. As was done in the case of exemption u/s.10(38) pursuant to amendment made by Finance Act 2017, CBDT is requested to issue without any delay a circular listing out various instances of purchase of listed shares which will qualify for adopting the share quotation as on 31.01.2018 as purchase cost.
b. In particular, instances where shares are issued by amalgamated companies (which are also listed companies) after 31.01.2018, the share quotation of the amalgamating company as on 31.01.2018 should be allowed to be pro-rated as per the share exchange ratio.
3.2 Amendment of Sec 50 C
At present if the capital asset transferred is land or building or both and the Stamp valuation of such property exceeds the actual consideration, then the stamp valuation will be deemed to the full value of consideration for the purpose of computation of capital gains.
Sec 50 C has been amended to provide that if the stamp valuation does not exceed the Actual consideration by 105 % , then the actual consideration will be deemed to the full value of the consideration .
Similar amendments have been made in Sec 56 / 43 CA
It is suggested to increase it to 15 % instead of 5 % and to make it applicable for all pending proceedings also.
3.3 Amendment of Sec 54 EC
At present LTCG on transfer of any capital asset if invested in Specified bonds (redeemable after 3 years) within 6 months will be eligible for exemption up to Rs.50,00,000/-. It is proposed to amend the section to limit the exemption to transfer of Land or buildings or both only. The lock in period has also been proposed to be increased to 5 years from the present limit of 3 years.
54 EC can be viewed as an Infrastructure booster and hence the following suggestions are made :
Benefit can be restored to all LTCA as before.
Can be extended to STCA with a lock in period of 5 to 7 years, depending on the amount.
Limit of Rs. 50 Lacs can be withdrawn.
Government, through the infrastructure companies like REC, NABARD, can get huge low cost funding from the tax payers who would be interested to invest in such funds rather than pay tax.
This measure, along with the suggestion to grant 80C benefit of Rs. 1 lakh per person (in Para 2 .3 above) to specifically boost the savings of the citizens that can be effectively channelized to the much needed infra projects as well as to retire high cost loans of the Government. The Gross Savings rate which was at 34% earlier and reduced now, can be pushed up, taking advantage of the immense propensity of the Indians to save.
4. Profits and Gains from Business or Profession
4.1 Conversion of Stock in trade in to Capital asset
At present conversion of Capital in to stock in trade will be chargeable to tax under capital gains and PGBP in the year in which the Stock in trade is sold. However, there is no specific provision to tax the conversion of Stock in trade in to Capital asset and sale was effected after the conversion.
Sec 2(24), 28 , 49 and 2(42 A) are proposed to be amended (from AY 2019-20) to tax the conversion of Stock in trade in to capital asset. Difference between the FMV and the Cost will become taxable as Business Income in the year of Conversion. Difference between Sale consideration and FMV will get taxed under Capital gains. Holding period will be reckoned from the date of conversion for ST/LT.
It is suggested that both Business income and capital gains are taxable in the year of sale of investment
4.2 Taxes on Amalgamation arrangements
Clause 3(a) of Finance Bill proposes to insert explanation 2(A) to section 2(22) so that in the case of an amalgamated company, the accumulated profits, whether capitalized or not or loss, as the case may be, shall be increased by the accumulated profits, whether capitalized or not, of the amalgamating company as on the day of amalgamation. It is submitted as under regarding this amendment:
(i) This is wholly contrary to the concepts of company as an independent legal entity, dividend and income
(ii) As per the amendment proposed, the amount of loan granted will be taxed at both ends, namely, in the hands of the lending company by way of DDT and also in the hands of the borrower u/s.2(22)(e). Further, there is no abatement provided even if the borrower has later repaid the loan or advance. This appears to be very harsh in its application. The reason given in the memorandum is that it is proposed to tackle devices / arrangements indulged by companies by way of granting loan to avoid payment of tax on distributed profits. When the GAAR provisions have already become operational, there is no need for SAAR provisions like this. In such cases of tax abuse, GAAR provisions can be invoked by the Assessing Officers.
(iii) Moreover, as per the provisions of section 230(5) of Companies Act 2013, the details of the merger proposals are required to be furnished by way of notice to the income tax authorities and they are allowed the opportunity to make their representations regarding the merger proposal to the NCLT. Only after considering all such representations, the NCLT will be approving the merger proposal. If the tax authorities highlight the abusive arrangement contained in the merger proposal, they can highlight the same to NCLT and under Companies Act 2013 as well as in the light of the decision in the case of Wood Polymer case, the NCLT have enough powers to reject the merger proposal.
(iv) Section 234 of Companies Act 2013 permits two way cross border merger of companies. Hence it is possible for an Indian wholly owned subsidiary to merge with its overseas parent company. In such a case, the Indian company will go out of existence and it is likely to become a branch office of the foreign company after obtaining BO license from RBI. Once that happens, will it be possible for Indian Tax Department to keep a tab on lending of the accumulated profits of the Indian subsidiary by the overseas parent company to its substantial shareholders who may be situated abroad. Even if the Indian Tax Authorities try to tax such instances, it may raise jurisdictional issues.
Hence the submission to withdraw this amendment once for all.
4.3 Withdrawal of income based deductions of Chapter VIA for late filers:
Section 80AC is proposed to be amended and to make it compulsory filing of return of income within the due date for claiming of the deductions under Chapter VIC. This amendment is made retrospectively from assessment year 2006-07. The Government made its avowed objective clear more than once that it would not resort to any retrospective amendment. Not only, a retrospective amendment dating it back to over a decade is now proposed, which in itself is a retrograde step but it is also not clear how this can /will be implemented. It is well settled that vested rights cannot be taken away by retrospective amendments. While this may not affect assessments which are already completed, it would affect pending appellate proceedings and thereby discriminate against such affected assessees. Even in such cases, the validity of the amendment could be subject to judicial scrutiny. Hence the suggestion to make this prospective in its application.
4.4 Amendments in relation to Notified ICDS
Sec 36 , 40 A and 145 A have been amended. Sec 43 AA, 43 CB and Sec 145 B have been inserted to overcome the Delhi High court judgment which stuck down certain portions of ICDS.
The amendments have been made with retrospective effective from AY 17-18.
It is once again politely reminded that this Government made a commitment that no retrospective amendments would be brought in and suggested Amendments can be made applicable prospectively from AY 2019-20
5. Other Amendments
5.1 Applicability of 40(a) (ia) 40 (A)(3) / 3A to charitable trusts and educational institutions referred in Sec 10(23C)
The provisions of Sec 40 (a) (ia) / 40 A (3) / 3A will apply to Charitable trusts and 10(23C) educational institutions
It is suggested Amendments can be extended to Sec 13 A also.
5.2 Relaxation for claiming deduction u/s 80 JJAA
At present deduction u/s 80 JJAA is available for employing new employees subject to satisfaction of certain conditions. One of the condition required to claim deduction u/s 80 JAA is that the new employee should be employed for at least 240 days (150 days for Manufacture of apparel) It is proposed to amend the section to provide that the deduction can be claimed in the succeeding year if the employee is employed for at least 240 days / 150 days in the succeeding year) . The 150 days condition is extended to manufacture of footwear and leather products also.
It is suggested 240 days and 150 days in both the years put together.
6. SUGGESTIONS IN RESPECT OF TIME LIMITS:
At present, Income Tax law does not have any time limits for completion of appeals in first and the second stages. This results in huge pendency of demands, which may be artificial also. It is suggested that a time limit of 2 years be fixed each for the first appeal and the second appeal stages.
The post budget memorandum basically addresses some of the issues arising out of the budget proposals and attempts to give some practical suggestions that would make things easy for governance as well as for tax payers, while taking care that the revenue augmentation attempts of the Government are not compromised.