The Budget session introducing the Finance Bill, 2020 was indeed one of the most anticipated events in the country which probably turned out to be less than eventful for most of its taxpaying audience. While various measures have been introduced in order to extend or broaden the existing tax incentives (specific to industries), the budget, however, was not so joyous so far as the redressal of grievances or resolution of disputes under the Income Tax Act, 1961 [“the Act” for short] is concerned. In the present article I have endeavoured to analyse certain crucial amendments in the provisions relating to appeals under the Income Tax Act, 1961 for our readers.

What are the proposed amendments?

So, let’s straightaway start with the amendments proposed in the Finance Bill, 2020. A chart of the amendments that have been proposed is as follows:

Section

Proposed Amendment and its rationale

What it means for the Assessee in simple words?

250

95. In section 250 of the Income-tax Act, after sub-section (6A), the following sub-sections shall be inserted, namely:—

“(6B) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of disposal of appeal by Commissioner (Appeals), so as to impart greater efficiency, transparency and accountability by—

(a) eliminating the interface between the Commissioner (Appeals) and the appellant in the course of appellate proceedings to the extent technologically feasible;

(b) optimising utilisation of the resources through economies of scale and functional specialisation;

(c) introducing an appellate system with dynamic jurisdiction in which appeal 5 shall be disposed of by one or more Commissioner (Appeals).

(6C) The Central Government may, for the purposes of giving effect to the scheme made under sub-section (6B), by notification in the Official Gazette, direct that any of the provisions of this Act relating to jurisdiction and procedure for disposal of appeals by Commissioner (Appeals) shall not apply or shall apply with such exceptions, 15 modifications and adaptations as may be specified in the notification:

Provided that no direction shall be issued after the 31st day of March, 2022.

A move towards e-appeal proceedings wherein submissions and hearings would be online with lesser to no interaction in person with the CIT(A)

253

96. In section 253 of the Income-tax Act, in sub-section (1), in clause (c), for the words, 20 figures and letters “under section 12AA”, the words, figures and letters “under section 12AA or section 12AB” shall be substituted with effect from the 1st day of June, 2020.

Right of appeal against an order u/s 12AB rejecting an application or refusing registration to charitable trusts, etc.

254

97. In section 254 of the Income-tax Act, in sub-section (2A),—

(a) in the first proviso, after the words “from the date of such order”, the words “subject to the condition that the assessee deposits not less than twenty per cent. of 25 the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act, or furnishes security of equal amount in respect thereof” shall be inserted;

(b) for the second proviso, the following proviso shall be substituted, namely:––

“Provided further that no extension of stay shall be granted by the Appellate Tribunal, where such appeal is not so disposed of within the said period of stay as 30 specified in the order of stay, unless the assessee makes an application and has complied with the condition referred to in the first proviso and the Appellate Tribunal is satisfied that the delay in disposing of the appeal is not attributable to the assessee, so however, that the aggregate of the period of stay originally allowed and the period of stay so extended shall not exceed three hundred and sixty-five 35 days and the Appellate Tribunal shall dispose of the appeal within the period or periods of stay so extended or allowed:”.

In order to obtain a stay on the outstanding demand, from the Income Tax Appellate Tribunal, the Assessee will have to pay 20% of the disputed demand or furnish security of an equal amount before seeking such stay or an extension thereof if the stay is already granted.

What is the impact of these amendments?

Amendment to section 250 introducing e-appeal proceedings

By virtue of the amendment to section 250, the Government has endeavoured to further its goal of a digital economy by introducing e-appeal proceedings as one of the modes of hearing and concluding the disputes between the Taxpayer (Appellant / Litigant) and the Government. As per the said amendment, it is now possible for the Government to frame and introduce a scheme whereby any appeal could be heard by way of no to minimum face to face interaction between the Taxpayer / Assessee and the Commissioner of Income Tax (Appeals) which is the First Appellate Authority [hereinafter referred to as “the CIT(A)” or “the FAA”] under the Act. Looking at the number of appeals filed each year coupled with the growing number of taxpayers, it appears to be a welcome step for disposal of appeals since it will entail lesser time in commuting, lesser time in discussion, lesser visits to the office of the CIT(A) resulting into more focused and detailed approach from both sides leaving little to no scope for deviation from the issues involved in appeal. However, as bright and sunny as it may look, it has its own flipside. Lets take a look at the amendment in a little more detail as follows:

1. The whole objective of the scheme to be proposed appears to be imparting of greater efficiency, transparency and accountability in disposing Appeals by the CIT(A). As per the proposed amendment this is sought to be achieved by (i) eliminating interface between the CIT(A) and the Appellant to the extent possible; (ii) optimizing utilization of resources through economies of scale and functional specialization; and; (iii) introduction of an Appellate system with the dynamic jurisdiction wherein an Appeal could be disposed off by one or more Commissioner (Appeals).

2. To start with it is imperative to understand what is probably sought to be achieved by the present proposed amendments. While it appears that the goal is of making an entirely digital economy, the said avowed objective of a digital economy could and should not be at the cost of justice itself. Considering the fact, that e-hearings/e-Appeals have already been tried in the Income Tax Appellate Tribunal and the limited success that has been achieved therein, it would have been wise if the quasi-judicial authority [the CIT(A)] is permitted to conduct hearings by way of a face to face interaction with the litigant in hearing and deciding Appeals rather than eliminating such an interface. It is a well-known fact that an effective judicial system involves granting a fair hearing to a litigant. Further, it is well settled that justice should also appear to have been done and hearings should not just be a mere procedural formality. In this regard, probably the first and foremost requirement is for the judge and the litigant to interact face to face, so that there is an increased scope for both the parties to put across their views and counter views and to seek or provide clarifications as and when necessary. It is a settled law that the office of the CIT(A) is a quasi-judicial authority which for all practical purposes exercises the powers of a Court in adjudicating disputes between the Taxpayer and the Revenue. Hence, it is imperative that there has to be interaction between the Appellant and CIT(A). A total elimination of such interaction is bound to cause more chaos than clarity, at the cost of fair adjudication which in turn may lead to further litigation.

3. To mitigate this, it is suggestible to introduce actual hearings through electronic mode like video conferencing, etc. so that the goal of achieving efficiency and transparency is also met with alongwith reducing the time and cost involved in litigation before the CIT(A).

4. Proceeding further the proposed objective is of achieving greater efficiency, transparency and accountability, which is sought to be through optimum utilization of resources through, (i) economies of scale; (ii) functional specialization; and (iii) by introducing a dynamic jurisdiction whereby an appeal could be deliberated upon and disposed off by one or more CIT(A)s. It is interesting to see that the Government is alive to the fact that a large number of similar cases come up for hearing and to which less than uniform orders are passed. Some of the similar cases would include cases pertaining to tainted purchases (commonly referred to as bogus purchases), long term gains/short term gains/losses in respect of penny stocks, cases pertaining to donations to some trusts investigated by the Income Tax department, cases pertaining to alleged accommodation entries in respect of loans or share capital, other cases arising out of large scale investigations by the Income Tax Departmental Authorities or other Enforcement Authorities, etc. It is true that such cases by and large may have a similar fact back ground but what needs specific mention here is that in order to uniformly apply a particular order or judgment in one case to another case it would be important to see whether the facts as well as the arguments / objections raised by the Assessee’s in both the cases are exactly the same and not merely similar2. It also needs to be highlighted here that more often than not a binding decision is not followed by some CIT(A)s citing this very reason that facts are different in the case at hand and that in the precedent cited. It is therefore not understood as to how the economic principle of economies of scale could at all be applied in hearing and disposal of Appeals and that too without a face to face interaction with the adjudicating authority. We must not forget that it is incorrect to perpetuate injustice in the name of uniformity or consistency.

5. Another fact that needs to be highlighted here is that, off all the illustrations mentioned above, the genesis more often than not is the investigation conducted by the Income Tax department itself. Therefore, what needs to be seen is the correctness and completeness of the investigation conducted by the Departmental Officers since the entire assessment and Appeal in such cases hinges on the investigation conducted. This is one of the major factors requiring consideration while disposing of Appeals. Such a faceless scheme for appeals can be successful only if it is supported by or preceded by detailed and standardized investigations and consequent assessment proceedings. It is therefore necessary to make the investigation and assessments standardized and only thereafter try to club or consolidate similar cases.

6. The proposed amendment also seeks to optimally utilize resources through functional specialization as well. I would like to believe that the demarcation as regards adjudication and disposal of Appeals requiring specialized knowledge of the subject (for example transfer pricing, interpretation of tax treaties, investigation matters, etc.) is already being done in cases wherever possible i.e. functional specialization in settling disputes is already resorted to since the cases get demarcated at the time of assessment itself. However, instead of creating a differentiation on the basis of existing specialization it would have been worthwhile to create further specialization in the existing work force through training and knowledge sharing. If such a thing is done then there would be no requirement to create a differentiation at all based on functional specialization. According to me, the entire body comprising of CIT(A)s should be equally aware of and capable of adjudicating any and every issue or dispute under the Act instead of creating a separate functional speciality within such body.

7. The next aspect which requires a far greater amount of deliberation and probably rethinking is the introduction of dynamic jurisdiction whereby an Appeal could be heard by more than one CIT(A). It appears by a bare reading of the proposed amendment that the office of the CIT(A) is greatly under estimated. For a majority of the tax paying community the CIT (A) is in fact one of the best options available in redressing their grievances under the Act. As per Section 250 of the Act and also since the inception of the Act appeals before the CIT(A) have been heard by only one CIT(A). Introduction of dynamic jurisdiction is a paradigm shift to the extant law and the customary as well as conventional application thereof. It is not clear as to when and which Appeal would be made subject to dynamic jurisdiction. It is also not clear as to whether before the hearing of the Appeal or during the hearing of the Appeal or after the conclusion of the hearing of the Appeal the dynamic jurisdiction would be invoked. These issues should be addressed by framing appropriate rules in this regard before any such scheme is implemented, though, it cannot be ruled out that the Government may retain the right to pick and choose Appeals which will be referred for adjudication based on dynamic jurisdiction. If this will happen then it may be violative of clause (b) of Section 119 (1) which prohibits the board to interfere with the discretion of the CIT(A) in exercise of his Appellate functions. In fact, unless, it is clearly spelt out in the scheme proposed, as to how the dynamic jurisdiction is to be invoked and what are the limitations to such invocation, it would appear that the prohibition contained in 119(1) (b) would be rendered nugatory. It may lead to a situation where discretion might result in discrimination in as much as the government may pick out a case at any given time, even after the conclusion of the hearing but before the passing of any order by the CIT(A), and order that, this case is picked up for reference to another CIT(A). If such a thing happens then the whole due process of law in the form of Appeal for redressing grievances would turn completely one sided.

8. Further, the greatest downside that could be seen in introducing a dynamic jurisdiction is that the litigant will be left stranded in the battle of viewpoints in case his Appeal is deliberated upon by more than one CIT(A) and he may or may not be aware as to what is the point of difference. Not only that, it is also not clear as to how many times the dynamic jurisdiction could be invoked or as to how many people will the Assessee (Appellant) will have to convince before his appeal is finally allowed or whether he will at all be allowed to represent before all the CIT(A)s before his appeal is finally decided. What could be seen from the above discussion is that the power of the Government amending the provisions relating to first Appeal might remain totally unchecked and could probably lead to a greater abuse rather than greater good especially in the absence of adequate safeguards It is but a matter of time. The idealistic goals sought to be achieved are greater efficiency, transparency and accountability but it is not clear as to in what terms is greater efficiency measured or transparency or accountability is to whom, the Government or the Taxpaying community. Such amendment is really a matter of grave concern for all the stake holders running this country by paying taxes. It is therefore, imperative that the proposed scheme is framed with adequate safeguards before it is implemented since the success of e-appeals will depend majorly if not entirely on the safeguards contained in the scheme against any possible abuse of power.

9. The scheme for e-hearing of appeals has been piloted on the lines of e-assessment proceedings. It needs mention that even developed countries like the U.S.A. have not resorted to faceless e-assessment proceedings relating to taxation and for good reason. The e-assessment proceeding in India looks fairly promising considering Indian dynamics but it has had its own share of problems. For example in many cases the notices are not sent to the assessees through e-mails or hard copies in post but merely uploaded on the portal and the Assessee is not even intimated about the same, while in some other cases even orders are passed by without serving a copy of the same on the Assessees, in other cases the Assessee’s not capable of using internet or e-mails are forced to reply via e-proceeding, etc. This leads to misuse of the scheme intended for the benefit of the tax payers and creates totally avoidable hardship and nuisance. These shortcomings of the scheme would have to be taken care of before taking it further in the form of e-appeal proceedings. In any case, e-appeal proceedings is already initiated and probably utilized as well by many Assessees since CIT(A)s are accepting written submissions on e-mail and even sending notices on e-mails which seems to be working fairly plus it also has an advantage of allowing personal hearing to the Assessee’s, if they so desire. One would therefore ponder over the reason for introducing a scheme which is probably in place, already. It will all depend upon the proposed scheme and till such time it will be merely speculating or being apprehensive on things which may or may not happen.

AMENDMENT TO SECTION 253 OF THE ACT:

This is a consequential amendment proposed whereby, any order rejecting registration of a Trust passed by the Principal Commissioner or the Commissioner under the proposed section 12AB of the Act would be appealable before the Income Tax Appellate Tribunal. The section confers a right of appeal to the Assessees against the orders passed u/s 12AB of the Act.

AMENDMENT TO SECTION 254 OF THE ACT:

1. The title of this Article is really derived from the amendment proposed to be made in Section 254 of the Act. To start with, what is the proposed amendment? The Income Tax Appellate Tribunal [“the Tribunal” for short] is the Second Appellate Authority under the Act. It is a Court exercising judicial functions. As per the extant provisions of first proviso to Section 254(2A) of the Act, the Tribunal is empowered to grant a stay of recovery in any proceeding relating to Appeal filed under sub-section (1) of Section 253 of the Act. There was a great latitude to the powers of the Tribunal in granting stay and in fact full stay of the outstanding demand was granted in most deserving cases while at the same time protecting the interest of the Revenue. While granting stay, the Tribunal would invariably consider merits of the Appeal, at least prima-facie, before granting the stay. By virtue of the present amendment the power of the Tribunal (Court discharging judicial functions) to grant stay has been curtailed so as to provide that the Tribunal could grant stay of outstanding demand only when the Assessee deposits at least 20% of the amount of tax, interest, fee, penalty or any other sum payable under the Act or the assessee furnishes security of equal amount thereof that is 20% of the disputed demand. Further, as per the second proviso to Section 254 (2A) the Tribunal’s power granting an extension of the stay of recovery of disputed demand is also curtailed. Now, even the second proviso is proposed to be amended so as to provide that before granting any such extension of stay, the assessee would be required to comply with the condition of 20% pre-deposit of the amount of disputed demands as provided in the first proviso. This is one of the most draconian, retrograde amendment ever proposed in the budget. This amendment is like dissecting the law without anaesthesia. The rationale for introducing such provisions is also fairly imperceptible particularly when the Revenue is duly protected and compensated by way of levy of multiple interests, fees and penalties under the Act for non-payment of dues. Needless to mention that the rate of interest granted on refunds is less than half of that charged on delayed payment of tax demanded. This amendment, therefore, is an attempt by the Legislature to step over the powers of a Court (judiciary) in discharging its judicial functions.

2. Now to start with, it needs specific mention that the Income Tax Appellate Tribunal plays the most pivotal role in the justice delivery system in India. The Tribunal has been held as one of the most effective means of dispute resolution under the Act. It has always lived upto its motto of “SULABH NYAY SATVAR NYAY”. This is primarily because the power of the Tribunal in adjudicating disputes was never sought to be controlled in this manner. However, because of the proposed amendment, this will lead to large amount of heart burn, undue financial hardship and greater chaos in the tax paying community. This is simply for the reason that a mandatory pre-deposit of disputed tax for granting of stay before adjudicating an Appeal (which is in effect a grievance of the tax payer) is not only a co-ercive means of recovery but also totally contrary to the well accepted canon of free-justice to all. It is also violative of certain articles of the Constitution of India like Article 265 which mandates that no tax shall be levied or collected unless under the authority of law, Article 14 Equality before the Law and Equal Protection of the Law and even Article 19(1)(g) providing no restraint on carrying of any lawful business or profession.

3. To put it simply by way of an example, say an assessee files a Return of Income for Rs.100/- and the assessed Income is Rs.500/- and the assessee has for whatever reason lost before the FAA. His only option is to approach the Tribunal seeking redressal of his grievances. As per the earlier provisions looking to the merits of the case the Tribunal was empowered to grant a complete stay on the entire disputed demand and even consequential penalty proceedings. However, by virtue of this amendment, the assessee (Appellant before the Tribunal) will have to invariably pay 20% of the disputed tax or at least provide security of an equal amount, before any stay is granted by the Tribunal. This would mean that such an assessee would have to pay tax even on the income which may ultimately not be his income at all or may not be taxable at all. Now, there may also be cases where a similar sum of Rs.400/- as mentioned in the above illustration is taxed in the hands of say Mr. X but is not so done in the hands of say Mr. Y, both of whom are say recipients of the same type of compensation from the same authority. In such a case, not only the law would be unequally applied but more importantly the justice would also be delivered in biased / partial way by asking one person to pay tax on certain receipt treated as income in one case but not so in the case of another. Another aspect of the matter is that introducing such a provision is likely to cause totally undue financial burden, financial hardship and mental agony to an entire body of aggrieved tax payers who have filed an Appeal before the Tribunal. This is because many of the litigants are individual tax payers who may or may not be able to either pay the disputed tax or provide a security in lieu thereof. Such tax payers will have to invariably bear the brunt of harsh and in many cases unwarranted co-ercive tax recovery measures which may lead to selling of business assets and in extreme cases even closure of business. Such a provision would therefore lead to differential application of law among tax payers (the ones who can furnish security or pay disputed tax and the ones who can’t furnish security or can’t pay disputed tax) forming one class i.e. litigants before the Tribunal. For this reason also the said provision is violative of the Constitution.

4. Another extremely important aspect that the provision fails to consider is the legally accepted principle of impossibility of performance. The term high pitched assessment is not new to income tax assessments nor is non consideration of binding judicial precedents or even circulars, instructions or notifications in favour of the assessee while passing assessment orders. Not only that, the Act does not provide any safeguard against pre-determined mindset of the Assessing Authorities in certain types of cases. In this environment introduction of such provisions seeking mandatory pre-deposit of disputed tax might lead to even closure of some good thriving businesses simply for paying the mandatory pre-deposit of tax. This will clearly violate Article 19(1)(g) of the Constitution.

5. The Income Tax Appellate Tribunal must be appreciated and lauded for its efforts in redressing grievances by introducing the unique system of granting early hearings through applications, quick fixation of matters pertaining to stay, early hearings, covered matters, etc. Invariable, the litigants look up to the Tribunal for a quick and fair disposal of the Appeals. In fact, it could very well be said that the Tribunal is probably the most effective justice delivery system in the country for disputes relating to taxation. It deserves all the appreciation. Not only that, it has been held by the Apex Court that the power to grant stay is ancillary and incidental to the appellate powers of the Tribunal and the Tribunal is empowered to grant stay if it is satisfied that the purpose of appeal will be frustrated by allowing to continue the recovery proceedings during the pendency of the appeal3 However, these provisions seek to put fetters on the exercise of powers by the Tribunal and thereby tinker with the independence of the Tribunal in its functioning. It is very unfortunate that while the Assessing Officer (lowest authority in the appeal proceedings) is empowered to grant a stay on the disputed demand without any limit but the Tribunal (the final fact finding authority under the Act) is deprived of such powers. These provisions therefore need to be seriously pondered over before being incorporated in the Act. It would be worthwhile to amend the proposed section so as to leave the pre-deposit of disputed tax to the discretion of the Tribunal (though it is being already done in all cases where the Tribunal finds it necessary taking into consideration the interests of the Revenue).

6. Apart from the above, in any case, impossibility of performance is always a defence against such a law and the Tribunal or the Judiciary will certainly step in and look into this aspect of the matter. It is also possible that these provisions could be read down as directory provisions seeking to safeguard the interest of the revenue and not mandatory per-se. A possible reading of the provision could be that firstly, disputed tax demand is not actual tax as defined in section 2(43) of the Act i.e. the tax chargeable under the provisions of the Act and till the Appeal is pending it cannot be said with certainty that it is tax chargeable under the Act. This is particularly so if prima-facie the Tribunal is of the view that the tax is incorrectly charged. Secondly, if the said provisions were absolutely mandatory then the government would not have even incorporated an option to furnish security of an equivalent amount and without even specifying the nature of security. In fact when similar fetters were put on the power of the Tribunal to grant stay beyond a period of 365 days, the Judiciary stepped in to read down the section and hold that stay could be extended even beyond a period of 365 days4. A similar view might be taken even for these proposed provisions.

7. Going further, it needs mention that though similar provisions for pre-deposit of disputed tax find a mention in Indirect Tax Laws, no parallel can be drawn between these provisions under the Direct Tax Laws and the Indirect tax laws. This is because firstly, the law and the subject of levy are totally different in the two set of laws and secondly, usually the mandatory pre-deposit under Indirect Tax Laws is before the First Appellate Authorities who are acting under the very same Ministry as the assessing authority itself.

8. To conclude, the proposed provisions are certainly likely to cause avoidable undue hardship to all tax paying litigants before the Tribunal. The same may also be declared unconstitutional for more than one reason especially since they seek pre-deposit of tax which may not at all be chargeable under the provisions of the Act. However, we may have to wait till the provisions are finally enacted into law and thereafter their interpretation by the Hon’ble High Courts or the Hon’ble Supreme Court.

 

1. Over the last few years, instead of providing the rationale for introducing certain amendments, the Explanatory memorandum merely spells out what the proposal is instead of why the same is introduced. In the present article, due care has been taken in referring to the same as also the budget speech and notes on clauses but the same is not reproduced herein for the sake of brevity.

2. Vinay Extraction v/s CIT – 271 ITR 450 (Guj), et. al.

3. M.K. Mohd. Kunhi – (1969) 71 ITR 815 (SC)

4. Adobe Systems – (2014) 228 Taxman 141 (All), Maruti Suzuki – (2014) 44 Taxmann.com 166 (Delhi), Vodafone Essar Gujarat – 233 Taxman 35 (Guj), et al.

The Finance Act, 1984, introduced for the first time the concept of Tax Audit under Income Tax Act for all assessees having turnover or gross receipts exceeding ₹ 40 lakh from F. Y. 1984-85 i.e. A.Y. 1985-86. Over period of years the limit of ₹ 40 lakh has gradually been increased and at present threshold limit is ₹ 1 Crore.

Section 44AB of the Act states that every person carrying on business is required to get his accounts audited if, total sales, turnover or gross receipts in business exceeds one crore rupees in any previous year. In case of a person carrying on profession he is required to get his accounts audited, if his gross receipts in profession exceeds fifty lakh rupees in any previous year.

As per Section 44AB the assessee was required to get his accounts of the previous year audited by an accountant on or before the “specified date” and furnish by that date report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed. It is further provided that the specified date as per Explanation means the due date for furnishing the return of income under sub-section (1) of section 139.

Section 139(1) provides that a person whose accounts are required to be audited under section 44AB, is required to file return of income by 30th September, of the assessment year. While in case of an person who is required to furnish report referred to in section 92E of the act, the return is required to be filed by 30th November of the assessment year.

Similar provision are provided for filing audit report along with return in provisions of section 10, section 10A, section 12A, section 32AB, section 33AB, section 33ABA, section 35D, section 35E, section 44AB, section 44DA, section 50B, section 80-IA, section 80-IB, section 80JJAA, section 92F, section 115JB, section 115JC, section 115VW of the Act.

At present Tax deduction at source and Tax collection at source provisions contained in section 194A, 194C, 194H, 194I and 206C have fasten liability of TDS/TCS on certain categories of person, if the gross receipt or turnover from business or profession carried on by them exceed the monetary limit specified in clause (a) or (b) of section 44AB. Therefore in such cases provisions of TDS/TCS are applicable if the person is covered under section 44AB.

The Finance Bill, 2020 has made amendments in respect of the above provisions.

Proposed amendments

According to the Memorandum explaining the Finance Bill it has been stated that in order to reduce compliance burden on small and medium enterprises it is proposed to increase the threshold limit of total sales, total turnover or gross receipts of a person carrying on business from one crore rupees to five crore rupees provided certain conditions are fulfilled and then he can be out of purview of tax audit.

It is also stated that in order to enable pre-filling of returns in case of person having income from business or profession it is required that tax audit report may be furnished by the person covered under tax audit at least one month prior to the due date of filling of return of income.

This requires amendments in all the sections of the Act which mandates filling of audit reports along with return of income or by the due date of filling of return of income. Thus, provisions of section 10, section 10A, section 12A, section 32AB, section 33AB, section 33ABA, section 35D, section 35E, section 44AB, section 44DA, section 50B, section 80-IA, section 80-IB, section 80JJAA, section 92F, section 115JB, section 115JC, section 115VW of the Act are proposed to amended.

Further, the due date of filling of return for an assessee referred to in clause (a) of Explanation to of sub-section(1) of Section 139 of the Act has been substituted with date of 31st October of the assessment year as against 30th September of the assessment year. However in case of person covered under section 92E (Transfer Pricing) due date of filing return has not been changed but in such cases Tax audit report is required to be obtained by 31st October of the assessment year instead of 30th November of the assessment year..

The new provisions of tax audit and related consequential amendments are discussed as under:

A) The threshold limit in respect of total sales, turnover or gross receipts in business of a person is proposed to be increased from rupees one crore to rupees five crore in order to be out of purview of tax audit under section 44AB. The two conditions have to be satisfied in order to be out of purview of tax audit. The following proviso has been inserted in clause (a) to section 44AB namely:

a) Aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five percent of the said amount; and

b) Aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five percent of the said payment, this clause shall have effect as if for the words “one crore rupees”, the words “five crore rupees” had been substituted.

Form the plain reading of the proviso the following points emerge:

i) Both the conditions of 5% in cash of receipts and payments are cumulative. A person who satisfies both the conditions will only be out of purview of tax audit.

ii) The condition (a) of proviso stipulate that “all the amounts received” in cash including amount received for sales turnover or gross receipts during the year does not exceed five percent of the said amount. It is pertinent to note that the word mentioned here is all receipts, which will also include receipts other than sales, turnover or gross receipts. The inclusive wording will include amount received in cash of total collection from debtors, sale of capital assets and other receipts. It is a very wide term and includes all types of receipts for calculation of five per cent of cash receipt.

The condition (b) of the proviso stipulate that “all payments” made in cash including amount incurred for expenditure. The payments are not restricted to expenditure but include payments such as made in cash to creditors, purchase of capital asset or any other payment which need not for expenditure. As stated above it is a wider term to be considered while calculating five percent of cash payment.

Between the two conditions the word “and” is used and hence both the conditions are to be satisfied cumulatively to be out of provisions of tax audit.

Hence if both the conditions are satisfied and total sales, turnover or gross receipts in business does not exceed rupees five crore in the previous year than the person will not be required to get his accounts audited under section 44AB.

B) However there is no change in threshold limit in respect of gross receipts in profession. As far as the person who is carrying on profession the limit of gross receipts of rupees fifty lakh remains. A person carrying on profession and having gross receipts of fifty lakh then he will have to get his accounts audited under section 44AB.

C) At present as per S.44AB, the person is required to get his accounts audited by an accountant before the “specified date”. The specified date means the due date of furnishing return of income under sub-section 1 of section 139. As per section 139(1) the due date means the 30th September of the assessment year.

The proposed amendment is made in section 44AB so as to specify the due date which is different from the due date of filing the return. The bill provides that due date means date one month prior to the due date of furnishing of return under section 139(1) of the Act. Hence in effect the accounts will be required to be audited one month prior to date of furnishing the return.

Simultaneously Section 139(1) is amendment and it has been provided that due date of filling of return in case of person covered under tax audit will be 31st October of the assessment year. Accordingly now the due date of getting accounts audited and due date of filling of returns covered under tax audit is different namely 30th September for tax audit and 31st October for filling of return. In short compared to earlier provisions there is no change in date of getting accounts audited, but due date of filing the return is extended by one month.

There is no change in due date of filing return in case a person is covered under section 92E of the act namely transfer pricing cases. Due date of filing return in such case remains same namely the 30th November of the assessment year. However considering the proposed change in due of getting account audited prior to one month of due date of filing return of income, in such cases date of getting accounts audited get reduced and now due date of getting accounts audited in cases covered under section 92E will be the 31st October of the assessment year as against 30th November.

Similar provisions in respect of due date of getting accounts audited are amended in section 44AD in cases of presumptive basis of tax and hence the person covered under section 44AD will also have the same due date as specified in section 44AB namely 30th September of the assessment year..

Memorandum to finance bill states this change due of getting account audited will enable the department to send pre-filed return. It seems that this will enable the department to consider certain adjustments before hand on the basis of tax audit report in case of persons having income from business or profession and are covered under tax audit. However there may be cases where certain actions, which might have taken subsequent to the date of tax audit and before filling of the return (say S.43B Payments) in such cases the person, will be required to be make corrections in pre-filed returns and claim the deduction. The person will have to take care such adjustments, if any, to be made before filling the return of income.

D) Considering these amendments a person is not required to get the books of account audited under section 44AB if the aggregate amount of total cash receipts and total cash payments are below five percent of the total aggregate receipts and total payments.

However it is also important to remember that there is no change in section 44AD of the Act in respect of presumptive basis of tax. Therefore such person is not compelled to pay the tax on presumptive basis. Thus the person can declare income as per books of account and is not required to get tax audit report. This seems to be anomaly in the provisions.

E) The amendment relating to extending threshold for getting accounts audited will have consequential effect on TDS/TCS provisions contained in section 194A, section194C, section194H, section 194I and section 206C as these provisions fasten the liability of TDS/TCS on certain categories of person, if the gross receipt or turnover from business or profession carried on by them exceed the monetary limit specified namely rupees one crore in case of business or rupees fifty lakh in case of the profession. Now the limit of getting books of accounts audited in certain category of persons is increased substantially and hence the limit of provisions of TDS/TCS is provided specifically in each of sections separately.

It has now been specifically provided in each of the above sections that the provision TDS/TCS will be applicable in case the turnover is of rupees one crore in the business or professional receipts of rupees fifty lakh in case of the profession, as the case may be. Therefore in such cases if turnover of business exceed one crore or professional receipts exceed rupees fifty lakhs during the financial year immediately preceding the financial year, then the person will be required to deduct TDS or collect TCS. One will be now required to remember the limit as laid down of rupees one crore in business and rupees fifty lakh in profession for the purpose of TDS/TCS.

F) The provisions of section 10, section 10A, section 12A, section 32AB, section 33AB, section 33ABA, section 35D, section 35E, section 44AB, section 44DA, section 50B, section 80-IA, section 80-IB, section 80JJAA, section 92F, section 115JB, section 115JC, section 115VW of the act provides that audit report / tax audit report is required to be filed along with return of income. Now similar provisions are made whereby the person covered under any of the above provision of the section mentioned above will be required to file such report one month prior to due date of filing the return.

Conclusion

The rationalization of the provision of section 44AB along with filing of various audit report and TDS/TCS provisions will usher in to simplification or not is question mark but one will have to vigilant and remember different dates for different provisions.

To summarize the provisions in nut shell,

1) Getting accounts audited under section 44AB and filing of the return are delinked. One month time will be available to file the return after audit of accounts. The date of getting accounts audited remains the same namely 30th September, The due date of filing return of income will be 31st October.

2) Date of filing Transfer Pricing Report under section 92E is 31st October and The due date of filing return of income will be 31st November.

3) The provisions of section 44AD are not amended and in few cases there will be anomaly. The person who otherwise though covered under section 44AD may be able to declare income as per books which may be less than stipulated under section $$AD instead of going for presumptive basis of tax and need not get his accounts audited.

4) The problem of working out 5 percent of all receipts including total sales, turnover or gross receipts and all payments including expenditure will be a challenge. The meaning of all receipts in cash will include amounts received from debtors, loans, sale of fixed assets, etc. and similarly all payments in cash will include amounts paid to debtors, repayment of loans, purchase of assets etc. There is no clarity as to whether deposit / withdrawals by proprietor or partners are to be considered for counting 5 percent One hopes that clarification in this matter in advance would help the tax payer to great extent.

5) Provisions of TDS/TCS in certain categories of the person is delinked with that of tax audit provisions and now turnover limit for persons in business is fixed at rupees one crore and for person in profession rupees fifty lakh.

6) Certain categories of persons who are covered under para F above will be required to file tax audit report/ audit report by 30th September.

Deduction or Collection of Tax at Source is an effective means of collection of tax. The scope of deduction / collection is expanded from time-to-time. Every Finance Bill carries some amendments. The Finance Bill 2020 also carries some amendments as well as it targets to collect tax on certain transaction. The scope of important amendments are explained and discussed hereinafter.

1. Section 191 – Amendment – Direct Payment of Tax.

Section 191 casts a responsibility on every assessee to pay tax on his own on every income which is not subject to deduction at source.

Sub-section(2) is sought to be inserted to provide for payment of tax, directly by an assessee, in whose hands income on account of Employees’ Stock Option arises. Generally such income is taxed in the year of allotment or transfer. It is proposed that tax on income arising on account of ESOP of an elligible start up company, shall be payble directly by the employee within fourteen days of certain events like expiry of fortyeight months from the end of relevant assessment year, date of sale of the security or the employee ceasing to be the employee of company alloting the security.

2. Section 192 – Amendment – Tax at Source on income under the head Salaries

Section 192 has been amended and its scope has been extended by insertion of sub-section (1C) to deduct tax at source on income arising from allotment / sale of security elligible security or cessation of employment, as specified in sub-section (2) of section 191. The employer shall now have to include such income in estimating the income under the head salaries. The tax is to be deducted or paid within fourteen days of accrual of income under conditions specified.

The amendment creates a new time frame for payment of tax and confusion is likely to arise on the date of payment of tax. It would be better if the date of payment be kept the same as date of payment of tax deducted from salaries.

3. Section 194 – Amendment – Tax at source on Dividend

This section provides for deduction of tax at source from dividends paid to a resident, within India. Tax is not to be deducted at source on dividend on which Dividend Distribution Tax is paid in terms of section 115O.

The scope of deduction of tax at source is sought to be extended to payments made by any mode other than cash or cheque or warrant. The rate of tax deduction is sought to be raised to ten per cent instead of the rates in force. The threshold limit for deduction is being raised from two thousand five hundred rupees to five thousand rupees. It is also proposed to consequentially omit the third proviso to the said section i.e. Dividend Distribution Tax.

4. Section 194A – Amendment – Interest other than Interest on Securities

Section 194A mandates deduction of tax at source on payment of interest other than interest on securities by an assessee other than Individual and HUF to a person resident in India. Individuals and HUF who are subject to tax audit in immediately preceeding financial year are also required to deduct tax at source at rates in force.

It is proposed that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under the said section.

It is also proposed to amend sub-section (3) so as to insert a proviso to provide that a co-operative society referred to in clause (v) or clause (viia) shall be liable to deduct income-tax in accordance with the provisions of sub-section (1), if–– (a) the total sales, gross receipts or turnover of the co-operative society exceeds fifty crore rupees during the financial year immediately preceding the financial year in which the interest referred to in sub-section (1) is credited or paid; and the threshold limit for deduction shall be fifty thousand rupees for senior citizens and forty thousand rupees in case of others.

5. Section 194C – Amendment – Payment to Contractors

Section 194C requires deduction of tax at source by a contractor for carrying out any work at one or two per cent depending upon the status of the payee.

It is proposed that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under the said section.

6. Section 194H & 194I – Amendment – Commission or Brokerage & Rent

The requirement for deduction of tax at source under these sections has been on payers other than individuals and HUF. The scope of deduction also extended to Individuals and HUF who have been subject to tax audit.

It is proposed that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under the said section.

7. Sction 194J – Amendment – Fee for Professional or Technical Services

Section 194J requires any person other than an Individual and HUF and specified Individuals and HUF who are subject to tax audit to deduct tax at source on payments in nature of Professional or Technical Services at a rate of ten per cent.

There have been instances of difference in view whether the payment should be covered u/s 194C or 194J. This has led to lot of litigation. In order to reduce the litigation it is proposed that in the case of fee for technical services, not being professional service, the rate of tax deduction at source shall be two per cent and in case of Professional services it shall be ten per cent.

It is also proposed that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under the said section.

8. Section 194K – Insertion – Income in respect of Units

A new section 194K is sought to be inserted to deduct tax at source from any income in respect of units of Mutual Fund specified u/s 10(23D), income distributed by Administrator of the specified undertaking or specified company. The rate of deduction at source is ten per cent. Threshold limit of five thousand rupees has been prescribed.

Insertion of section 194K, apparently seems to have been inserted after restricting the scope of section 115R to payments made up to 31st March, 2020.

Tax u/s 194K is to be deducted on ‘any income’. The term any income has not been defined or clarified. It may be subject to different interpretation whether it is restricted to income of nature similar to dividend or may also include income in nature of capital gain also at the time of redemption of the units.

9. Section 194LBA – Amendment – Income from units of a Business Trust

At present Business trust are required to deduct tax on distribution of income, referred to in section 115UA, being of the nature referred to in sub-clause (a) of clause (23FC) or clause (23FCA) of section 10, at the rate of ten per cent to a resident and at the rate of five per cent to a non-resident (not being a company) or a foreign company, respectively.

It is proposed to amend the said section so as to omit the reference of sub-clause (a) of clause (23FC) of section 10 from the said section. Thus, liability to deduct tax shall be applicable on distribution of income referred to in section 115UA, being of the nature referred to in clause (23FC) or clause (23FCA) of section 10, to a resident and to a non-resident (not being a company) or a foreign company.

It is further proposed to amend sub-section (2) of the said section to provide that the tax is to be deducted at the rate of five per cent in case of income the nature referred to in sub-clause (a) of clause (23FC) of section 10 and at the rate of ten per cent in case of income of the nature referred to in sub-clause (b) of the said clause.

10. Section 194-O – Insertion – Payment of certain sums by e-commerce operator to e-commerce participant

E-commerce business has been increasing over a period of time in view of advancement in technology. To widen and deepen the tax net by bringing participants of e-commerce within tax net, it is proposed to insert a new section 194-O in the Act so as to provide for a new levy of TDS at the rate of one per cent of the gross amount of sale or services or both to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier. Any payment made by a purchaser of goods or recipient of service directly to an e-commerce participant for sale of goods or provision of services or both, facilitated by an e-commerce operator, shall be deemed to be amount credited or paid by the e-commerce operator to the ecommerce participant and shall be included in the gross amount of such sales or services for the purpose of deduction of income-tax under the said sub-section.

Where e-commerce participants are Individuals or HUF, no deduction of tax at source shall be made if the sum credited or paid or likely to be credited or paid during the previous year to the account of an e-commerce participant, where the gross amount of such sales or services or both during the previous year does not exceed five lakh rupees and the ecommerce participant has furnished his Permanent Account Number or Aadhaar number to the e-commerce operator.

Sub-section (3) of the said section provides that notwithstanding anything contained in Part B of this Chapter a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of Part B of this Chapter. Part B of the Chapter refers to provisions for Deduction of Tax at Source.

It is further proposed to exclude the application of the said sub-section to any amount or aggregate of amounts received or receivable by an ecommerce operator for hosting advertisements or providing any other services which are not in connection with the sale of goods or services referred to in sub-section (1).

Definitions of the expressions “electronic commerce”, “e-commerce operator”, “e-commerce participant” and “service” have been stated. This amendment will take effect from 1st April, 2020.

11. Section 206C – Amendment – Collection of Tax at Source

Sub-section (1G) and (1H) are proposed to be inserted in section 206C.

(1G) relates to collection of tax at source on:

Remittances out of India of amount of rupees seven lakh rupees or more made through Authorised Dealer in a financial year under the Liberalised Remittance Scheme of Reserve Bank of India,

In respect of an overseas tour programme by a seller of overseas tour programme package.

The collection is to be made at a rate of five per cent of the amount debited / collected.

(1H) relates to collection of tax at source, by the seller, if he receives consideration for sale of any goods of the value or aggregate value exceeding fifty lakh rupees in any previous year.

The collection is to be made at a rate of 0.1 per cent of the sale consideration exceeding fifty lakh rupees.

If the buyer does not provide his PAN / Aadhaar number collection of tax at source has to be at one per cent.

(i) Section 43CA, in the Income-tax Act 1961, is a “Special provision for full value of consideration for transfer of assets other than capital assets in certain cases”.

This provision has been brought on the statute by the finance Act 2013, with effect from 1st April 2014. Finance bill 2020 proposed to amend the proviso to sub section (1) of the Act. The amendment is to the effect that the present tolerance limit of variation, in the value adopted or assessed or assessable by the authority for the purposes of payment of stamp duty, existing at one hundred and five per cent of the consideration, has been increased to one hundred and ten percent of the consideration in the value adopted, or assessed or assessable by the authority for the purposes of stamp duty. This amendment will come into effect from
1st April 2021, and will apply in relation to Assessment Year 2021-22, and subsequent Assessment Years.

(ii). Section 50C of the Income Tax Act is a “Special provision for full value of consideration in certain cases”. This provision has been brought on statute by Finance Act 2002 with effect from 1-4-2003. Finance bill 2020 purposed to amend the third proviso to sub section (1) that has been brought on statute by Finance Act 2018, with effect from 1-4-2019. The amendment was to the effect, that the present tolerance limit of variation, in the value adopted on or assessed or assessable by the stamp valuation authority existing at five per cent of the consideration received or accruing as a result of the transfer is increased to ten percent of the consideration so received or accruing as a result of transfer, shall for the purposes of section 48, be deemed to be the full value of consideration. This amendment will take effect from 1st April 2021 and will accordingly apply in relation to Assessment Year 2021-22, and subsequent assessment years.

(iii). An amendment has been proposed in clause (x) sub clause (b) in item ‘B’ in sub item (ii) (x) of sub section (2) of section 56 of Income Tax Act 1961.

The amendment was to the effect, that for the words “five percent”, the words “ten percent” shall be substituted with effect from the 1st day of 2021, and accordingly apply in relation to assessment Year 2021-22 and subsequent assessment years. This was yet another amendment to the tolerance limit brought into the statute by Finance Act 2018 with effect from 1-4-2019, at “five percent”, now to “ten percent”, by virtue of the present amendment.

Tax on dividend is something which has got constant attention of the lawmakers. We have yet another amendment to deal with and this time it’s a mammoth one.

Background

Dividend is a part of the profits of a company that is paid to the people who own shares in it. A company earns profits, on which it pays tax. This tax paid profit can be distributed to the shareholders in the form of dividend; which can be termed as return on investment. Such dividend is considered as income of the shareholders. Such profits of the company which has already suffered tax, again suffers tax in the hands of the shareholders. This treatment is considered by many as amounting to double taxation. Such conclusion is strengthened when similarly placed structures i.e., firms and LLPs are evaluated. The tax paid profit of a firm/ LLP, when distributed amongst the partners, is not again subjected to tax in the hands of the partners, and the same is exempt u/s 10(2A) of the Act.

Many a times, people are not able to digest the act of the Government in giving incentives to the companies vis-à-vis other persons, in the form of beneficial tax rate. Such angst amongst the other classes of taxpayers, as to favourable treatment to the company may not be justified, as the tax paid profits of the company when distributed again suffers tax in the hands of the shareholders and that too at the normal rates.

History of tax on dividend in India since 1961

Tax on dividend has undergone many flip flops. It was sometimes taxed in the hands of the shareholders and sometimes in the hands of the company in the form of Dividend Distribution Tax (DDT). The journey of tax on dividend so far is brought out as under:

Period

System of tax

01.04.1961 till 31.05.1997

Tax in the hands of the shareholders

01.06.1997 till 31.03.2002

DDT regime

01.04.2002 till 31.03.2003

Tax in the hands of the shareholders

01.04.2003 till 31.03.2020

DDT regime

01.04.2020 onwards

Tax in the hands of the shareholders

When the first change was made from the classic system of taxation to DDT by Finance Act, 1997, the Circular No. 763 dated 18.02.1998, explained the logic behind such insertion. It stated that the purpose was to reduce the paper work and to reduce the effect of double taxation. It is interesting to note that, tax on dividend amounts to double taxation was first acknowledged by the Government in this Circular.

When the DDT regime was reversed by Finance Act, 2002, the Hon’ble Finance Minister Shri Yashwant Sinha, in his Budget Speech, reasoned that there is an inherent inequity in the present system, which allows persons in the high-income groups to be taxed at much lower rates than the rates applicable to them.

Immediately in the next Budget, the system was reversed to DDT system. The reason given for this restoration in the budget speech was to promote investment in the industrial sector, improve the debt and equity markets and to bring the small investors back to the equity markets by restoring their confidence. Thus, the logic changed with the change in the ministers.

At this juncture, it may be noted that such amount of DDT is considered as an additional income tax in the hands of the payer company. This is clear from the section itself. In fact, this is also held by the Apex Court in case of Godrej & Boyce Manufacturing Company Ltd. vs. DCIT [394 ITR 449(SC)]. In this case, the Court held that DDT cannot be construed as tax paid on behalf of the taxpayers, accordingly, section 14A was made applicable.

Subsequently, in 2016, the Government vide Finance Act, 2016, introduced a new section i.e., section 115BBDA, whereby a person (other than company and other few exceptions) is taxed on dividend received over ₹ 10 lakhs at the rate of 10%. The Hon’ble FM in his speech, stated that DDT applies uniformly to all investors irrespective of their income slabs. This is perceived to distort the fairness and progressive nature of taxes. Persons with relatively higher income can bear a higher tax cost and therefore, section 115BBDA was inserted.

Proposed amendment

After a long period of 17 years of jostling with DDT, the Budget for the year 2020-21 has proposed to bring back the classical system of tax i.e. tax on dividend in the hands of the shareholder. Resultantly, the following amendments are proposed:

Change in system of tax

1. Section 115-O shall apply to all dividends declared, distributed or paid by a company on or before 31.03.2020, after which, it shall cease to apply.

2. Similarly, section 115R shall apply to any amount of income distributed by the specified company or a Mutual Fund to its unit holders only up to 31.03.2020.

3. Section 10(34) and 10(35) which provided exemption to the shareholders and unit holders respectively, will cease to apply after 31.03.2020.

4. Further, section 115BBDA is amended to apply only on dividends declared, distributed or paid by a domestic company upto 31.03.2020.

TDS

5. TDS is now to be deducted u/s 194 on dividend at the rate of 10% and threshold is proposed to be increased from ₹ 2,500/- to ₹ 5,000/- for dividend paid other than in cash. Further, the present mode of payment, which is payment by an account payee cheque or warrant is to change to any mode.

6. TDS is also to be deducted on payment of dividend to non-residents u/s 195.

7. TDS is now to be deducted under a new section 194K by any person responsible for paying to a resident any income in respect of units of a Mutual Fund specified u/s 10 (23D) or units from the administrator of the specified undertaking or units from the specified company. Such TDS is to be deducted @ 10%. Threshold limit of ₹ 5,000/- is provided so that income below this amount does not suffer tax deduction.

8. TDS shall be applicable u/s 196A on payment to a non-resident, not being a company, or to a foreign company, of an income in respect of units of a Mutual Fund specified u/s 10 (23D) or from the specified company referred to in the Explanation to section 10(35) @ 20%. Further, the present mode of payment is to change to any mode.

9. Section 196C provides, inter alia, for TDS on income by way of interest or dividends in respect of bonds or GDRs payable to a non-resident, referred to in section 115AC @ 10%. The exclusion of dividend referred to in section 115O is removed. Further, the present mode of payment is to change to any mode.

10. Income in respect of securities referred to in 115AD(1)(a) payable to a Foreign Institutional Investors (FII) is subject to TDS u/s 196D @ 20%. The exclusion of dividend referred to in section 115O is removed. Further, the present mode of payment is to change to any mode.

Consequential amendments

11. Consequential amendments of removing reference to section 115-O in various sections like section 57, 115A, 115AC, 115ACA, 115AD and 115C of the Act, are also proposed.

12. Consequential amendment proposed in section 10(23D), as mutual fund no longer required to pay additional tax.

Business trust

13. In so far as a business trust is concerned, the dividend distributed by SPV to such trust was exempt u/s 10(23FC). This exemption has been continued. When the trust distributes such dividend income to the unit holders, it was exempt in the hands of the unit holders u/s 10(23FD). Such exemption on dividend income to the unit holders of the business trust is proposed to the withdrawn. This is by making suitable amendments in section 10(23FC), 10(23FD) and 115UA of the Act.

14. TDS is to be deducted by the business trust u/s 194LBA on dividend income paid to unit holder, @ 10% for resident. For Non-Resident, it would be 5% for interest and 10% for dividend.

Deduction u/s 57

15. Section 57 is proposed to be amended to allowed deduction of only interest expense from the dividend income, or income in respect of units of a Mutual Fund [specified u/s 10(23D)] or specified company [defined in the Explanation to section 10(35)]. Further, such deduction is also limited to the extent of 20% of such income included in the total income for that year, without deduction under this section.

Removal of cascading effect (Section 80M)

16. Section 115-O, provided a deduction of dividend received from a subsidiary company (more than 50% shareholding), while calculating DDT on dividend distributed by the holding company, thereby removing the cascading effect. To continue such beneficial treatment, section 80M is proposed. It states that where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company, then in computing the total income of first company, a deduction of an amount of dividends received from other domestic company shall be allowed. However, such deduction shall be restricted to the amount of dividend distributed by the first mentioned domestic company on or before the date which is one month prior to the date for furnishing the return of income u/s 139(1). Deduction allowed once, shall not be allowed in any other year.

Rationale behind proposed amendment

Interestingly, the explanation given in this behalf is worth pondering. The Hon’ble Finance Minister, in her speech stated that the system of levying DDT results in increase in tax burden for investors and especially those who are liable to pay tax at less than the rate of DDT, if the dividend income is included in their income. Further, non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return on equity capital for them. Therefore, to increase the attractiveness of the Indian Equity Market and to provide relief to a large class of investors, it is proposed to remove DDT and adopt the classical system of dividend taxation.

Explanatory Memorandum, in this regard, states that the incidence of tax on dividend is on the payer company/Mutual Fund and not on the recipient, where it should normally be. Moreover, it also states that the present provisions levy tax at a flat rate across the board irrespective of the marginal rate at which the recipient is otherwise taxed. The purpose behind reintroduction of DDT by the Finance Act, 2003, was to ease the collection of tax at a single point and to reduce the compliance burden. However, with the advent of technology and easy tracking system available, the justification for current system of taxation of dividend has outlived itself.

Thus, the main reason for bringing back classical system of tax on dividend is stated to be a regressive state of affair of having a common rate of tax for all shareholder in all slabs. However, it may be noted that for the same reason, section 115BBDA was inserted. This reason, therefore, doesn’t appear to be the main reason for change. The Government may be lured by the increased surcharge rate which is effective from AY 2020-21; though it has been announced that the removal of DDT will lead to estimated annual revenue forgone of ₹ 25,000 Crore.

Impact of the amendment

The positives of bringing back the classical system are:

i. The company shall no longer need to comply with section 115O and it no longer shall be treated as assessee in default. This risk increased when DDT was made applicable even on deemed dividend u/s 2(22)(e) of the Act by Finance Act, 2018.

ii. Amount to be distributed by the company will be more as even the tax amount will be distributed amongst the shareholders.

iii. Shareholders falling in lower slab rates or whose total income does not exceed the maximum amount chargeable to tax will benefit.

iv. Entities whose income is totally exempt like charitable trusts etc. will benefit

v. Person who incurs loss in a year, will be eligible to set off such loss against dividend income and avoid tax on such income.

vi. The foreign entities or non-residents will be able to take treaty benefits of beneficial rates as well as tax credits.

vii. Section 14A becomes inapplicable. Therefore, litigation will reduce to this effect.

viii. Foreign companies having branch in India will benefit by setting up subsidiary company in place of branch. If such new company is set up after section 115BAB becomes effective and it is into manufacturing activities, then its profit will be taxed @ 15% and when dividend is distributed, such dividend may be taxed at beneficial rate under the treaty which may be 10% or so. Thus, the effective rate of 44% on the branch in India will reduce substantially if company is set up in India. In such cases, the Department will try to prove that the Indian company is PE of the foreign company and thereby try to tax such profits at the higher rates.

The negatives are:

i. TDS compliance on the company will increase. I feel that this compliance will be more than the compliance u/s 115O. The company will be required to deduct TDS on payment of dividend to various shareholders. It has to file TDS return with PAN of thousands or lakhs of shareholders. Further, it will have to issue TDS certificates to such shareholders. There may arise issues as a result of TDS mismatch etc. due to the sheer volume.

ii. High Networth Individual (HNI) shareholders will face the music. The dividend income above ₹ 10 lakh was taxed at the rate of 10% u/s 115BBDA. Now, the same will be taxed at the highest rate applicable with surcharge. Further, there shall also be a requirement to pay advance tax, as TDS will be @ 10% only, while such income may be charged to tax at much higher rate.

Business Trusts

Business Trusts, REITs and INVITs are the biggest losers. This concept of business trust was introduced in the year 2016. At that time, the Hon’ble FM promised that the dividend by SPV to the trust and by the trust to its unit holder will not be taxed and that it will enjoy complete tax exemption. The reason behind such exemption was explained in Circular No. 3 of 2017. It was stated that, under SEBI regulations both the SPV and business trust are obligated to distribute 90% of their operating income to the investors, whereas in case of normal real estate company, there is no requirement of such annual distribution of dividends. As a result, these initiatives have not yet taken off. In order to rationalise the taxation regime for business trusts (REITs and Invits) and their investors, provisions of sections 10, 115-O, 115UA and 194LBA of the Act were amended to provide a special dispensation and exemption from levy of DDT.

With such promise, investments were made in such business trusts. However, suddenly, there is a change in policy decision to tax shareholder. As a result, within 3 years of such investment, the dividend income becomes taxable in the hands of the unit holder. With such policy change, the business trust structure will again become unviable, though the funds would have been blocked in the trusts already formed.

Deductions from dividend income

The litigation u/s 14A in respect of dividend income will come to rest. But one will not be better off as section 57 has been amended to restrict deduction allowable from dividend income or income in respect of units of a Mutual Fund or specified company. Only deduction of interest expense is to be allowed and such deduction is to be restricted to 20% of such income. This appears to be harsh. The fundamental concept of tax is to tax the real income of a person. Such real income is computed after deduction of expenses incurred. However, restricting deduction from dividend income doesn’t appeal much, especially when such tax is in the nature of double taxation as already explained earlier.

In a case, where no dividend income is received, no deduction will be allowed, though expenses would have been incurred. This goes against the principles laid down by the Apex Court in Badridas Daga vs. CIT [34 ITR 10(SC)]. Though, we have enjoyed the reverse scenario u/s 14A, where we happily argued, that in absence of any dividend income, disallowance should not be made u/s 14A of the Act.

Section 57(iii) states that deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income shall be allowed. Thus, one has to demonstrate that the expense has been incurred wholly and exclusively for the purpose of making or earning such income. This condition shall continue to apply even to interest expense under the proposed proviso. As a result, deduction of interest expense shall be allowed only if it is proved that such expense has been incurred wholly and exclusively for the purpose of making or earning dividend income.

Proviso to section 57 proposes to restrict deduction of interest expense to 20% of such income included in the total income for that year, without deduction under this section. A deduction u/s 80M has been provided to a domestic company in respect of amount of dividends received from other domestic company. An issue will arise as to whether, such limit of 20% is on the dividend income after deduction u/s 80M or before deduction
u/s 80M. In my view, it should be before deduction u/s 80M, as 80M forms part of Chapter VIA of the Act. Section 80A states that any deduction under this section is to be allowed only from the gross total income and such term is defined in section 80B(5) to mean total income computed in accordance with the provision of this Act, before making any deduction under Chapter VIA. Thus, application of section 80M is at a much later stage.

Section 80M

Deduction u/s 80M is to be allowed by the company claiming such deduction only from the dividend it distributes upto one month prior to the due date of filing return of income u/s 139(1). Thus, to claim deduction, all companies will endeavour to declare and distribute such dividend before such date, so as to get the deduction of dividend received in such year. Earlier, it was due date of filing of return of income. It is important to note that what is relevant is not declaration of dividend but distribution of such dividend.

Interestingly, such deduction is not allowed while computing MAT, which will give rise to tax consequences.

Non-Residents

Non-residents and foreign companies who are not eligible for treaty benefits, will have to pay tax on dividend income u/s 115A of the Act @ 20% plus surcharge and cess. Further, no deduction is to be allowed in computation of such income as per section 115A(3). Thus, not even the allowance of interest to the extent of 20% of the dividend income is permissible. Further, if the income of such person consist only of income referred to in clause (a) or clause (b) of section 115(1) and requisite tax has been deducted at source on such income, then such person shall not be required to file a return of income under this Act.

Similarly, the dividend income on GDRs which are purchased in foreign currency, shall be charged to tax @ 10% u/s 115AC of the Act. Further, no deduction is to be allowed u/s 57 in computation of such income. Also, no return to be filed if necessary TDS is deducted on such income and if the total income only consists of the income referred to in section 115AC. Similar amendments are also made in section 115ACA of the Act which deal with an individual being a resident and an employee of Indian company or its subsidiary engaged in specified knowledge based industry.

Dividend income of FIIs are to be taxed @ 20%. Further, no deduction is to be allowed u/s 57 in computation of such income.

Corresponding TDS implications are provided for in section 195, 196C and 196D of the Act.

Planning in case of companies having huge accumulated profits as on 31.03.2020.

From 1st April, 2020, the new regime will kick in. Companies having huge reserves and whose shareholders are those who are taxable in the highest slab of surcharge, may think of declaring interim dividend up to 31.03.2020 and pay applicable DDT on the same. Just to understand the difference of tax in two regimes a small table is prepared below:

Say, if a company wants to distributes dividend of ₹ 6 crores and all shareholder fall under the highest slab of surcharge. The applicable taxes under both the regimes will be as under:

DDT regime

New regime

Particulars

Amount/ Rate

Particulars

Amount/Rate

Dividend

6,00,00,000

   

DDT rate

17.47%

   

DDT amount

1,27,02,598

   

In the hands of shareholder

 

In the hands of shareholder

 

Dividend amount

6,00,00,000

Dividend amount

6,00,00,000

Tax rate u/s 115BBDA (if SC is 37%)

14.25%

Tax at normal rate

42.74%

Tax u/s 115BBDA

85,48,800/-

   

Total tax implication

2,12,51,398/-

Total tax implication

2,56,46,400/-

   

Incremental tax

43,95,002/-

Thus, there is an increase in tax under the new regime. In such cases, the company may think of declaration of dividend prior to 31.03.2020.

Another option in such cases will be to buy back the shares, subject to the provisions of Companies Act, and pay tax u/s 115QA @ 23.3%.

Tax on Buy back

Section 115QA was inserted by Finance Act, 2013, w.e.f. 1.06.2013. Simultaneously, section 10(34A) was inserted. These new provisions, taxed the income arising on buyback of share in the hands of the company and exemption was given to the shareholders.

Purpose of such introduction is given in Circular No. 3/2014 – 24.01.2014. It is stated that unlisted companies, as part of tax avoidance scheme, resort to buy back of shares instead of payment of dividends in order to avoid payment of tax by way of DDT particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate. Therefore, such section was inserted.

With the end of DDT, logically even section 115QA should go. However, as already explained above, in some cases where tax on dividend in the hands of the shareholders is falling in the highest rate, a company may decide to distribute reserves by way of buyback. Thus, it will be beneficial if such section stays.

Dividend from foreign company – section 115BBD

It may be noted that any dividend received by an Indian company from a foreign company in which such Indian company holds 26% or more of the share capital, shall be continued to be taxed @ 15% u/s 115BBD of the Act. A dividend on which was tax is paid u/s 115BBD is allowed to be set off against the dividend declared by an Indian company, while computing the amount of DDT payable u/s 115O of the Act. Such benefit, is now no longer available. Deduction u/s 80M is allowed only in respect of dividend received from any domestic company.

Thus, sea changes are proposed in respect of dividend taxation and I will have to tackle new sets of issues in the years to come. Considering the nature of the present government, one may even expect some more fireworks in the years to come. Nevertheless, tax practitioners have something new to apply their brains.

 

Some taxpayers were hoping the exemptions and deductions would be increased. They were also expecting the income tax slabs to be widened. Everybody wanted the tax structure to be simplified and their tax burden to come down.

Finance Minister Smt. Nirmala Sitharaman, in her second Budget, has proposed an alternate tax regime giving benefit of lower tax rates to individual tax payers as well as Hindu Undivided Families. She has claimed it as a step towards simplification of taxation. Exemption limit has been retained at ₹ 2,50,000 but the slabs have been reoriented as an option. However, Individuals having income up to ₹ 5 Lakh will not be required to pay any income tax as they will continue to get tax rebate of ₹ 12,500 under section 87A.

Alternate Tax Regime : The Finance Minister has proposed an Alternate Tax Regime by way of new Section 115BAC and the same will apply in relation to the assessment year 2021-22 and subsequent assessment years. The Salient features are discussed here below :

1. Seven Tax Slabs under optional tax regime

On compliance of prescribed conditions, an individual or HUF shall, from assessment year 2021-22 onwards, have the option to pay tax in respect of the total income at following rates:

Total Income and Slab Rate under the alternate tax regime:

Up to ₹ 2,50,000 Nil

From 2,50,001 to 5,00,000 5 per cent.

From 5,00,001 to 7,50,000 10 per cent.

From 7,50,001 to 10,00,000 15 per cent.

From 10,00,001 to 12,50,000 20 per cent.

From 12,50,001 to 15,00,000 25 per cent.

Above 15,00,000 30 per cent.

2. Option to be exercised :

a) The option shall be exercised for every previous year where the individual or the HUF has no business income, and in other cases the option once exercised for a previous year shall be valid for that previous year and all subsequent years.

b) The option shall become invalid for a previous year or previous years, as the case may be, if the Individual or HUF fails to satisfy the conditions and other provisions of the Act shall apply;

c) the concessional rate shall not apply unless option is exercised by the individual or HUF in the form and manner as may be prescribed,-

i) where such individual or HUF has no business income, along with the return of income to be furnished under section 139 (1); and

ii) in any other case, on or before the due date specified under sub-section (1) of section 139 of the Act for furnishing the return of income for any previous year relevant to the assessment year commencing on or after 1st April, 2021 and such option once exercised shall apply to subsequent assessment years;

d) Limited Option in case of taxpayers having business income: Option can be withdrawn only once where it was exercised by the individual or HUF having business income for a previous year other than the year in which it was exercised and thereafter, the individual or HUF shall never be eligible to exercise option under this section, except where such individual or HUF ceases to have any business income in which case, option shall be available as in case of taxpayers having no business income.

3. Individual or HUF opting for concessional rate not eligible for various exemptions/deductions as part of conditions for concessional rate

According to the condition listed in section 115BAC, means that the individual or HUF opting for taxation under the newly inserted section 115BAC of the Act shall not be entitled to the following exemptions/ deductions:

Leave travel concession as contained in clause (5) of section 10;

House rent allowance as contained in clause (13A) of section 10;

Some of the allowance as contained in clause (14) of section 10;

Allowances to MPs/MLAs as contained in clause (17) of section 10;

Allowance for income of minor as contained in clause (32) of section 10;

Exemption for SEZ unit contained in section 10AA;

In case of Salaries persons Standard deduction, deduction for entertainment allowance and employment/professional tax as contained in section 16;

Interest on housing loan under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23. (Loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law);

Additional depreciation under clause (iia) of sub-section (1) of section 32;

Deductions for Investment in new plant or machinery in notified backward areas under section 32AD; Deduction for amount deposited in Tea/ Coffee/ Rubber deployment account under section 33AB; deduction for amount deposited in Site Restoration Fund under section 33ABA;

Various deduction for donation for or expenditure on Scientific Research contained in section 35(1)(ii) or (iia) or(iii) or section 35(2AA);

Deduction in respect of expenditure on specified business under section 35AD or Deduction in respect of agricultural extension project under section 35CCC;

Deduction from family pension under clause (iia) of section 57;

Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc). However, deduction under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.

4. Some allowances to be allowed under section 10(14)

As many allowances have been provided through notification of rules, it has been proposed to carry out amendment of the Income-tax Rules, 1962 subsequently, so as to allow only following allowances notified under section 10(14) of the Act to the Individual or HUF exercising option under the proposed section 115BAC:

(a) Transport Allowance granted to a divyang employee to meet expenditure for the purpose of commuting between place of residence and place of duty;

(b) Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office;

(c) Any Allowance granted to meet the cost of travel on tour or on transfer;

(d) Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

5. Some allowances NOT to be allowed under section 10(14)

It has also been proposed to amend Rule 3, so as to remove exemption in respect of free food and beverage through vouchers provided to the employee, being the person exercising option under the proposed section, by the employer.

6. Set off of Loss or depreciation not permitted

a) The income of such taxpayer is to be computed without set off of any loss carried forward or depreciation from any earlier assessment year if such loss or depreciation is attributable to any of the deductions referred to in para (3) above. Likewise the income of such taxpayer is to be computed in case of loss under the head house property without any set off of such loss with any other head of income.

b) The loss or depreciation shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year so however, that where there is a depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on 1st April, 2021, corresponding adjustment shall be made to the written down value of such block of assets as on 1st April, 2020 in the prescribed manner, if the option is exercised for a previous year relevant to the assessment year beginning on 1st April, 2021;

7. Unit in the International Financial Services Centre

If the individual or HUF has a Unit in the International Financial Services Centre [section 2 (zc) of the Special Economic Zones Act, 2005], as referred to in section 80LA(1A), the deduction under section 80LA shall be available to such Unit subject to fulfilment of the conditions contained in that section; and

8. AMT shall not apply

It has been proposed to amend section 115JC so as to provide that the provisions relating to Alternate Minimum Tax (AMT) shall not apply to such individual or HUF having business income.

Carry forward and set off of AMT credit not permitted: It has also been proposed to amend section 115JD so as to provide that the provisions relating to carry forward and set off of AMT credit, if any, shall not apply to such individual or HUF having business income.

9. The comparison of tax burden between existing tax rates and new alternate tax regime:

a) Case Study 1: If a taxpayer having income of ₹ 15 lakh would have claimed benefit of Standard Deduction from salary for ₹ 50,000; deduction for ₹ 1,50,000 under section 80C, and for Interest on housing loan for ₹ 2 Lakhs under section 24, his taxable income will come to ₹ 11 Lakhs (after aforesaid deductions) and his tax liability under the existing regime will be ₹ 1,48,200, whereas under the new regime tax liability on ₹ 15 lakhs comes to ₹ 195,000. Thus in such a case new tax rates are not advisable.

b) Case Study 2: An individual taxpayer with gross salary up to ₹ 12.5 lakh claiming only deductions under section 80C (₹ 1.5 lakh), 80D (₹ 25,000) and Standard deduction of ₹ 50,000 from Salary will pay more tax under the new personal income tax regime. Lower the gross salary, higher the additional tax payable by individuals in the new tax regime claiming only the above three deductions in the old tax regime.

c) Case Study 3: An individual with gross salary of ₹ 12.5 lakh claiming only deductions under section 80C (₹ 1.5 lakh), 80D (₹ 25,000) and standard deduction from Salary of ₹ 50,000 will pay tax of ₹ 1,20,000 on taxable income of ₹ 10,25,000. He will pay tax of ₹ 1,25,000 which comes to ₹ 5,000 more tax under the new personal income tax regime.

d) Case Study 4: Salaried individual not claiming any exemptions or deductions Assuming no tax deductions or exemption are claimed in the existing personal tax regime, the individual with gross salary of ₹ 7.5 lakh is paying tax of ₹ 52,500 (if Standard deduction from salary is considered) and he would pay tax of ₹ 37,500 and thus save tax of ₹ 15,000 if he/she opts for the new personal tax regime.

e) Case Study 5: Assuming no tax deductions or exemption are claimed (except standard deduction from Salary) in the existing personal tax regime, the individual with gross salary of ₹ 10 lakh is paying tax of ₹ 1,02,500 (if Standard deduction from salary is considered) and he would pay tax of ₹ 75,000 under the new tax regime and thus save tax of ₹ 27,500 if he/she opts for the new personal tax regime.

Thus the taxpayers need to check their tax liability under the existing regime and new optional regime and should carefully decide whether to go for new tax regime. An individual who is currently availing more deductions and exemption may choose to avail them and continue to pay tax as per the old regime.

10. Comparative Tax Slabs at a glance

Was Taxed at

Annul Income

Will Be Taxed At..

Nil

Up to ₹ 2.5 lakh

Nil

5%

₹ 2.5 lakh to ₹ 5 lakh

5%

20%

₹ 5 lakh to ₹ 7.5 lakh

10%

₹ 7.5 lakh to ₹ 10 lakh

15%

30%

₹ 10 lakh to ₹ 12.5 lakh

20%

₹ 12.5 lakh to ₹ 15 lakh

25%

Above ₹ 15 lakh

30%

On its part, the Finance Ministry expects four out of five taxpayers to move to the new tax regime. It analysed the income and investment data of 57.8 million taxpayers and found that 69% would save on tax under the new system. Another 20% might want to switch to avoid the hassles and paperwork involved in tax planning. It is advisable to consider all aspects and decide on the exercise of option!

(Narayan Jain is former Secretary General of AIFTP and author of the books “How to Handle Income Tax Problems” and “Income Tax Pleading & Practice”

1.0 Introduction

1.1 The Finance Bill, 2020 has been presented amid an economic slowdown and rising food inflation. The Finance Minister believes that the direct tax proposals in the Finance Bill, 2020 would, among others, stimulate economic growth and simplify tax structure. To quote from her Budget Speech “In continuation of the reform measures already taken so far, the tax proposals in this budget will introduce further reforms to stimulate growth, simplify tax structure, bring ease of compliance, and reduce litigations. In this Article, an attempt has been made to provide an overview of some of the important tax proposals concerning corporates and non-residents.

2.0 Corporate tax proposals

A. Abolishment of Dividend Distribution Tax (DDT):

2.1 Under the existing provisions of sections 115-O(1) and 115R(2) of the Act, a domestic company/mutual fund is required to pay DDT on the income distributed to shareholders/unit holders. The amount of DDT paid by the company is treated as the final payment of tax in respect of the amount declared, distributed or paid by way of dividend. Such dividend referred to in section 115-O is exempt in the hands of shareholders under clause (34) of section 10 except in case of a shareholder who receives dividend in excess of ₹ 10 lakh and is liable to pay tax under section 115BBDA. Similar exemption is available to unit holders receiving dividends from mutual funds under section 10(35).

2.2 The Finance Bill 2020 has proposed to amend section 115-O(1) to provide that only dividend declared, distributed or paid on or after the 1st day of April, 2003 but on or before the 31st day of March, 2020 shall be covered under the provisions of the said section. Similarly, an amendment in section 115R(2) has been made to provide that the income distributed on or before the 31st day of March, 2020 shall only be covered under the provisions of that section. Consequential amendments have been made to section 10(34), 10(35), section 115BBDA and section 57 of the Act. These amendments will be effective from the assessment year 2021-22.

2.3 The effect of the above amendments would be that the companies and mutual funds would not be liable to pay DDT on dividends declared, distributed, or paid on or after 1st April 2020. Dividends would be taxed in the hands of the recipient of income viz., shareholders/unit holders from AY 2012-22 even if the amount of dividend received is less than ₹ 10 lakhs. In this connection, one would also have to be mindful of the effect of section 8 of the Act which deems that any dividend envisaged under section 2(22) shall be taxable in the year in which such dividend is declared, distributed or paid. Section 8 also declares that an interim dividend shall be taxable in the year in which it is unconditionally made available by the company to the member who is entitled to it.

2.4 While computing the taxable income, the shareholder/mutual fund unit holder would be entitled to claim deduction on account of interest [capped to 20% of the dividend income]. This is provided under the proposed proviso to section 57. Under section 80M1, a domestic company receiving dividend from another domestic company would be eligible to claim deduction towards dividend received if the recipient company pays further dividend to its shareholders. The Memorandum to the Finance Bill explains the rationale and effect of these amendments in the following words:

The incidence of tax is, thus, on the payer company/Mutual Fund and not on the recipient, where it should normally be. The dividend is income in the hands of the shareholders and not in the hands of the company. The incidence of the tax should therefore, be on the recipient. Moreover, the present provisions levy tax at a flat rate on the distributed profits, across the board irrespective of the marginal rate at which the recipient is otherwise taxed. The provisions are hence, considered, iniquitous and regressive. The present system of taxation of dividend in the hands of company/ mutual funds was reintroduced by the Finance Act, 2003 (with effect from the assessment year 2004-05) since it was easier to collect tax at a single point and the new system was leading to increase in compliance burden. However, with the advent of technology and easy tracking system available, the justification for current system of taxation of dividend has outlived itself.

In view of above, it is proposed to carry out amendments so that dividend or income from units are taxable in the hands of shareholders or unit holders at the applicable rate and the domestic company or specified company or mutual funds are not required to pay any DDT. It is also proposed to provide that the deduction for expense under section 57 of the Act shall be maximum 20 per cent of the dividend or income from units.”

2.5 Some of the other relevant amendments consequential to abolishment of DDT are tabulated below:

Amended provision

Effect

Section 10(23FC)

All dividends received or receivable by business trust from a special purpose vehicle is exempt income under this clause

Section 10(23FD)

Dividend income received by a unit holder from business trust would not be exempt in the hand of unit holder of the business trust.

Section 115UA(3)

Dividend income distributed by a special purpose vehicle to business trust would be taxed in the hands of unit holder.

Section 80M

Section 80M is proposed to be incorporated in the Act to remove the cascading effect of tax on dividend income received by a domestic company from another domestic company forming part of its gross total income, where the recipient company pays further dividend to its shareholders on or before the due date.

Due date has been defined to mean the date one month prior to the date of furnishing the return of income under section 139(1).

The deduction in respect of dividend income would therefore be limited to the extent of dividend distributed by the recipient company one month prior to the due date of filing of return of income.

Section 115A

Section 115(1)(a) interalia provides that dividend other than dividends referred to in section 115-O included in the total income of a non-resident or a foreign company shall be taxed at 20%.

Finance Bill 2020 has proposed to omit reference to section 115-O consequent to abolition of DDT regime. As a result, a foreign company or a non-resident would now have to pay tax on dividend at the rate of 20% under section 115A.

Section 115AC

Under the existing provisions of section 115AC of the In-come-tax Act, a concessional treatment is available to non-resident taxpayers in respect of income arising by way of inter¬est, dividends except dividends referred to in section 115-O or long-term capital gains from such bonds or shares of an Indian company which are issued in accordance with a scheme notified by the Central Government and which are purchased in foreign currency. Such income is charged to tax at a rate of 10% only.

The Finance Bill 2020 has omitted reference to section 115-O from section 115AC. Consequently, any dividend in respect of bonds or GDRs referred to in section 115AC would be taxable at 10%.

Section 115ACA

Under the existing section 115ACA an employee of an Indian company engaged in specified knowledge based industry or service is liable to pay tax at the rate of 10% on dividends (other than dividends referred to in section 115-O) in respect of GDRs purchased in foreign currency. Section 115ACA also covers dividends income of an employee of subsidiary of the above referred Indian company.

The Finance Bill, 2020 has omitted the reference to section 115-O from section 115ACA. Consequently, the employees of Indian company or its subsidiary referred to in section 115ACA would be liable to pay tax at the rate of 10% on dividends arising from the GDRs acquired in foreign currency.

Section 115AD

Under the existing section 115AD, a Foreign Institutional Investor (FII) is liable to pay tax on dividends received in respect of securities (other than dividends covered under section 115-O) at the rate of 20%. With the proposed omission of reference to section 115-O from section 115AD, FIIs would be liable pay tax at 20% in respect of any dividends arising from securities.

Section 115C

The Finance Bill, 2020 has proposed to amend the definition of ‘investment income’ under sction 115C(c) by omitting reference of section 115-O from the aforesaid definition. This proposed amendment would require the non-resident Indians to pay tax at 20% on dividends arising from a foreign exchange asset as envisaged under section 115E

Section 194

TDS on dividend income to be made by the company / mutual fund if the amount of dividend declared to a shareholder / unit holder exceeds ₹ 5,000. Tax is to be deducted at the rate of 10% and not at the rates in force.

Section 194LBA

Tax deduction by business trust on dividend paid to unit holder at the rate of 10%.

Section 194K

Any person responsible for paying to a resident unit holder, any income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or units from the administrator of the specified undertaking or units from the specified company, shall withhold tax at the rate of 10 percent, if the such income exceeds INR 5,000/- in a financial year.

Section 195

Section 195 would be applicable qua dividends paid to a non-resident.

Section 195 prescribes that taxes are to be deducted at the rates in force. Rates in force for the purposes of section 195 is defined under section 2(37A)(iii).

As per 2(37A)(iii), the expression ‘rates in force’ for the purpose of deducting tax under section 195 means rate specified in the Finance Act of the relevant year or rate specified in the applicable Treaty, whichever is more beneficial to the assessee.

The Finance Bill, 2020 has prescribed TDS rate for different categories of payees. For a non-resident Indian payee, TDS rate on investment income is 20%. For a foreign company, there is no specific rate of TDS qua investment income or dividends. Consequently, for investment income or dividends, the residuary rate of 40% would be applicable. The rates prescribed in the Finance Bill 2020 would then have to be compared with the rate of tax prescribed under the applicable Treaty. TDS would have to be made at the rate specified in the Treaty only if the same is less than 20% or 40%, as the case may be.

Section 196A

This section has been revived. TDS on income in respect of units of mutual funds to a non-resident would have to be made by a person responsible for paying such income.

Section 196C and 196D

These sections have been amended to remove exclusion provided to dividend income referred to in section 115-O.

The amendments in TDS sections listed above are applicable from 01-04-2020. Other amendments will be applicable from AY 2021-22.

B. Proposals related to start-ups:

2.6 During her Budget Speech, the Finance Minister emphasised that start-ups have emerged as engines of growth for the Indian economy and accordingly the Government is committed to hand hold them and support their growth. In line with the said commitment, the Finance Minister has proposed following for the start-ups.

2.7 The first proposal concerns the rationalisation of section 80IAC. Section 80IAC in its current form provides for a deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible start-up for 3 consecutive assessment years. The 3 consecutive years can be chosen by the eligible start-up out of 7 years beginning from the year in which the eligible start-up has been incorporated. The deduction is available subject to the conditions that (i) the eligible start-up is incorporated on or after 01-04-2016 but before 01-04-2021; and (ii) the total turnover of its business does not exceed 25 crore rupees.

2.8 It is proposed to amend section 80IAC to extend the tax holiday benefit to larger start-up by enhancing the turnover limit for eligibility from existing limit of
₹ 25 crores to ₹ 100 crores. The Government has also taken cognizance of the fact that it is less likely that a start-up would be generating profits in the initial years so as to enjoy the tax holiday benefit. Hence it has proposed to extend the period of eligibility for claim of deduction from the existing 7 years to 10 years. These amendments would be applicable from AY 2021-22.

2.9 Under the second proposal, the Government has proposed to defer the tax deduction and tax payment on perquisite value on exercise of ESOPs by employees of start-ups by introducing sub-section 1C in section 192. The rationale for this proposal has been explained by the Finance Minister in her Budget Speech. The relevant portion of the speech reads as under:

During their formative years, start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term. In order to give a boost to the start-up ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest.”

2.10 Under the proposed section 192(1C), an eligible start-up referred to in section 80-IAC paying any income to the assessee being perquisite arising from ESOPs as referred to in section 17(2)(vi) shall deduct or pay tax on such income within 14 days of the earliest of the following events:

(i) expiry of 48 months from the end of the relevant assessment year;

(ii) the date of sale of such specified security or sweat equity share by the assessee;

(iii) the date on which the assessee ceases to be the employee of the start-up.

Tax is to be deducted at the rates in force of the financial year in which the said specified security or sweat equity share is allotted or transferred. Consequential amendments have been made under section 191, 156 and 140A so as to defer collection of tax relating to ESOP perquisite from an employee of start-up. These amendments have ushered a new concept of ‘deferred demand notice’. If an eligible employee fails to pay tax on ESOPs within the time period proposed in section 156(2) then a demand notice could be served on him by the department.

2.11 It is important to note that no amendment has been proposed to sections 15 or 17(2)(vi) which currently governs the taxability of perquisite arising from ESOPs. Section 15 read with section 17(2)(vi) mandates that the value of perquisites arising on ESOPs is chargeable to tax in the year in which specified security or sweat equity shares under the ESOPs are allotted to the employee. The value of perquisite is computed having regard to the fair market value of such security / shares on the date of exercise of options under the ESOPs. Section 192 only deals with tax deduction from payments constituting salary. Despite introduction of section 192(1C) and amendments 191, 140A and 156, value of perquisite arising from exercise of ESOPs would be chargeable to tax in the year of allotment of specified security / seat equity shares [and hence includible in the total income of the year of allotment of shares].

2.12 The objective of deferring the ‘collection of tax’ by altering the provisions of section 140A, 156, 191 and 192 was to give relief to employees of start-up companies. The amendments may not achieve the desired result in the absence of a specific amendment to other sections like 200, 234A, 234B, 234C, 40(a)(ia) etc. For instance, absence of amendments in sections 234A, 234B and 234C may lead to a situation where the concerned employee may have to pay interest thereunder. This situation would also be applicable for an individual opting for the proposed regime of taxation under section 115BAC.

C. Modification of concessional tax schemes for domestic companies under section 115BAA and 115BAB

2.13 Sections 115BAA and 115BAB were introduced in the Act vide the Taxation Laws (Amendment) Act, 2019. These sections provide domestic companies an option to be taxed at concessional tax rates provided they do not avail specified deductions and incentives. Some of the deductions prohibited are deductions under any provisions of Chapter VI-A under the heading “C. Deduction in respect of certain incomes” other than the provisions of section 80JJAA.

2.14 Amendments have been proposed to rationalise the provisions of sections 115BAA and 115BAB to provide that any domestic company (both existing as well as new) opting for concessional tax regime will not be allowed to claim any deduction under Chapter VIA of the Act except deductions under sections 80JJAA or section 80M. Thus, earlier the bar was related to deductions covered under Part C of Chapter VI-A except deduction under section 80JJAA. The companies opting for tax regime under section 115BAA and 115BAB were allowed to claim applicable deductions contained in other parts of Chapter VI e.g., deductions under sections 80G / 80GG. With the proposed amendments, these companies can only claim deduction under sections 80JJAA and 80M. These amendments would be applicable from AY 2020-21.

D. Exemption of income of sovereign wealth funds generated from investments in Indian infrastructure companies – Section 10(23FE):

2.15 Section 10(23FE) has been proposed to be incorporated in the Act with effect from AY 2021-22 to incentivise the investment by the Sovereign Wealth Fund of foreign governments [including the wholly owned subsidiary of Abu Dhabi Investment Authority (ADIA)] in Indian infrastructure companies. As per this section, exemption would be available qua dividend, interest or long-term capital gains arising from an investment made by ADIA and sovereign wealth fund in debt or equity of Indian infrastructure companies carrying on business referred to in Explanation to section 80-IA(4)(i) of the Act or such other business as may be notified by the Central Government in this behalf. In order to be eligible for exemption, the investment is required to be made on or before 31-03-2024 and is required to be held for at least 3 years.

3.0 Tax proposals related to non-residents

A. Amendment to section 6 proposing taxation of global income of non-resident Indian citizen:

3.1 It has been proposed to insert sub-section (1A) in section 6 to provide that an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India. In other words, the proposed amendment to encompass Indian citizens within the tax net who are Globally ‘stateless’ for tax purposes. The rationale of this proposal has been explained in the following terms in the Memorandum to Finance Bill 2020 in the following words “The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable for tax anywhere in the world. Such a circumstance is certainly not desirable; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.”

3.2 The proposed sub-section 1A to section 6 reads as under:

Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”

3.3 Going by the intention of the Government (as forthcoming from the Memorandum), an Indian citizen who invites residency in any other country / territory would not be covered within the ambit of section 6(1A). On the other hand, if an India citizen avoids residency in any country / territory would be covered under section 6(1A). However, section 6(1A) in its present form will not only cover an Indian citizen who avoids residency but would cover all cases where an Indian citizen has not paid tax in any other country / territory. This is because of the deployment of the phrase ‘not liable to tax in any other country or territory’.

3.4 In fact, subsequent to presentation of the Budget, it was reported that the proposed section 6(1A) is being understood as a provision to tax every Indian working in other countries where they are not liable to pay income tax by reason of the domestic laws of such countries. The CBDT on 02-02-2020 issued a press release clarifying that the proposed amendment is an anti-abuse provision to capture some Indian citizens who shift their stay in low or no tax jurisdiction to avoid payment of tax in India. It was also stated therein that the proposed amendment in section 6 should not be interpreted to create an impression that those Indians who are bonafide workers in other countries, including in Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. The CBDT further clarified that an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. The Board has also stated that necessary clarification, if required, shall be incorporated in the relevant provision of the law.

3.5 The issuance of the above clarification by the CBDT is unusual as the same has been issued in respect of a provision which is yet to be enacted. Notwithstanding the same the press release by CBDT has equated the proposed section 6(1A) with section 6(6) read with proviso to section 5(1) which taxes income earned of a RNOR. This could lead to unintended interpretations.

B. Amendment to section 9 – Significant economic presence (SEP) and Business connection

3.6 The Finance Bill, 2020 proposes certain changes to the SEP provisions. The applicability of SEP is proposed to be deferred to Assessment Year 2022-23. The Memorandum to Finance Bill clarifies that SEP is determined on the basis of payments arising from the specified transactions or the number of users crossing the prescribed threshold. However, since discussion on this issue is still going on in G20-OECD BEPS project, these thresholds are not yet prescribed. G20-OECD report is expected by the end of December 2020. It is therefore proposed to defer the applicability of SEP provisions.

3.7 Explanation (2A) which dealt with SEP is proposed to be in force in a substituted form. The said Explanation which was a clarificatory provision is now being re-introduced as a ‘declaratory’ provision. The substituted Explanation (2A) states that transaction in respect of goods, services or property carried out by non-resident with any person in India would constitute SEP. Thereby, business connection scope appears to have been expanded by encompassing transactions ‘with India’ which was hitherto only limited to ‘in India’.

3.8 Explanation 1(a) to section 9(1) states that if the operations of non-resident’s business are not wholly carried out in India, only such part of income as is reasonably attributable to operations carried out in India would be deemed to accrue or arise in India. Such Explanation 1(a) is proposed to be applied in situations when SEP fails in establishing business connection. This amendment is proposed to be effective from AY 2022-23. The consequence is a business connection which emerges on account of SEP need not have any operations in India and could still have income which is deemed to accrue or arise in India. In other words, physical operations in India is not a pre-condition for attributing income to a SEP.

3.9 Explanation 3A to section 9(1) is proposed to be inserted. It is an explanation to an explanation [i.e., Explanation 1(a)]. The proposed Explanation (3A) reads as under:

Explanation 3A.— For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from– (i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;

(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and

(iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.”

3.10 Explanation 3A ushers in certain situations income from which is deemed to be attributable to operations carried out in India. It intends to extend the gamut and reach of income which are said to be attributable to operations carried out in India. There are three instances captured herein.

3.11 The first instance is about an advertisement which targets an Indian customer or which is accessed by such customer through an internet protocol address in India. The advertisement could be of goods, property or service. It could be communicated physically, digitally, electronically or through any modes of internet. It should be a targeted advertisement. The target should be Indian resident(s); although not limited to such Indian residents. The closing portion of this clause states that a customer who accesses this advertisement through an internet protocol address in India would result in non-resident having operations in India. Such advertisement need not be a targeted one. The only pre-condition is access of such advertisement through internet protocol in India. As an overall point, it is important to analyse which non-residents could possibly be covered within the provision? There could be various players in an advertisement business. The ad-designing, advertisement agency, broadcasting agency, liasoning personnel etc. One would have to await for any clarifications if each of these businesses is impacted by such amendment.

3.12 The second instance deals with sale of data. Such data should be collected from a person who resides in India or from a person who uses internet protocol address located in India. The contents of the data are irrelevant. The nexus of the data contents with India is not relevant. It is interesting to observe that this limb only deals with ‘sale’ of data. Thereby it does not cover ‘use’ or ‘exploitation’ of data collected from India. The legislative intent is possibly not to cover such ‘use’ or ‘exploitation’ as it may result in unintended clash with the concept of royalty. Further, such data should be collected from a person residing in India. It means that such data should be gathered or fetched. It could be for consideration or without consideration [CIT vs. Smt. Padma S. Bora [2013] 355 ITR 368 (Bombay)].

3.13 The third instance deals with sale of goods or services. Such sale should use data collected from a person who resides in India or from a person who uses internet protocol address located in India. The locale of sale is inconsequential. The linkage of the sale to the data collected in India is the clinching factor to establish operations being in India. The use of the data collected in India could take any form. (a) It could be one of the constituents of the sale/ service; (b) it could be instrumental in creation of the goods or service being sold; (c) it could be critical to determine the time and place of sale; (d) it could empower the non-resident with experience or technical specifications which enables the sale. Thus, the reach is wide and deep.

3.14 A proviso is proposed to be appended below Explanation (3A) which states that that the provisions contained in Explanation (3A) shall also apply to the income attributable to the transactions or activities referred to in Explanation 2A [or SEP]. The use of the term ‘also’ indicates that income attribution in Explanation 3A is not only applicable to SEP but also other forms of business connection referred in Explanation 2.

3.15 The Finance Bill, 2020 proposes to include attribution of profits to Business connection/ SEP within the framework of the safe harbour rules and the Advance Pricing Arrangement regimes, which were hitherto limited to Arm’s Length Price determination.

C. Proposals related to APA and safe harbour rules:

3.16 Section 92CB of the Act empowers the Central Board of Direct Taxes (Board) for making safe harbour rules (SHR) to which the determination of the arm’s length price (ALP) under section 92C or section 92CA of the Act shall be subject to. As per Explanation to said section the term “safe harbour” means circumstances in which the Income-tax Authority shall accept the transfer price declared by the assessee.

3.17 Section 92CC of the Act empowers the Board to enter into an advance pricing agreement (APA) with any person, determining the ALP or specifying the manner in which the ALP is to be determined, in relation to an international transaction to be entered into by that person.

3.18 Taking cue from the fact that both SHR and the APA have been successful in reducing litigation in determination of the ALP, amendments have been proposed in section 92CB and section 92CC to cover determination of attribution to PE within the scope of SHR and APA. These amendments will apply from AY 2020-21.

D. Power to make rule in respect of income from business connection

3.19 Section 295 of the Act deals with power of the Board to make rules for carrying out of the purposes of the Income-tax Act. The Finance Bill 2020 has proposed to amend section 295 of the Act so as to empower the Board for making rules to provide for the manner in which and the procedure by which the income shall be arrived at in the case of:

(i) operations carried out in India by a non-resident; and

(ii) transaction or activities of a non-resident.

The amendment for clause (i) will take effect from AY 2021-22. The amendment for clause (ii) will take effect from AY 2022-23.

E. Amendment in section 94B:

3.20 Section 94B, inter alia, provides that deductible interest or similar expenses exceeding one crore rupees of an Indian company, or a permanent establishment (PE) of a foreign company, paid to the associated enterprises (AE) shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortisation (EBITDA) or interest paid or payable to AE, whichever is less. Further, a loan is deemed to be from an AE, if an AE provides implicit or explicit guarantee in respect of that loan. AE for the purposes of this section has the meaning assigned to it in section 92A of the Act. Interest paid to all the AE’s [except as provided in section 94B] are covered under section 94B.

3.21 Under the existing provisions, a branch of the foreign company in India is regarded as a non-resident in India. Further, the definition of the AE in section 92A, inter alia, deems two enterprises to be AE, if during the previous year a loan advanced by one enterprise to the other enterprise is at 50 per cent or more of the book value of the total assets of the other enterprise. Thus, the interest paid or payable in respect of loan from the branch of a foreign bank may attract provisions of interest limitation provided for under this section.

3.22 In order to give relief to foreign banks receiving interest from its branches in India, the Finance Bill, 2020 has proposed to amend section 94B of the Act so as to provide that provisions of interest limitation would not apply to interest paid in respect of a debt issued by a lender which is a PE of a non-resident, being a person engaged in the business of banking, in India. This amendment would be applicable from AY 2021-22.

4 Applicable tax rates for companies (as amended by proposals under Finance Bill, 2020):

1. Section 80M conditions have been outlined later in this write-up.

The second NEC meeting was well attended with active participation from all the members. I thank each and every member for their valuable contribution. The conference at Indore was well planned by the Central Zone team headed by Shri Vinay Jolly. The efforts by the two stalwarts of the Central Zone, our past president, Shri Ganesh Purohit and Shri Pankaj Ghiya, an active and dynamic NEC member, must be applauded. The delegates present were enriched by the technical sessions.

The last week of January 2020 was more than troublesome to the tax consultants practising GST. The GSTN functioning erratically and also not functioning at majority of places in India created an utter chaotic situation showing absolute lack of preparedness by the Centre. On the evening of 31st January 2020 a call was taken in consultation with the immediate past president, Dr. Ashok Saraf, to challenge the provisions under the GST Act especially in view of the fact that the GST authorities did not pay any heed to the request by multiple associations throughout India to extend the time for filing the annual return in Form-9 and audit report in Form-9C. A permission was sought by
Dr. Saraf from the Chief Justice of Gauhati High Court for opening the Court on Saturday 1st January 2020 being holiday. The permission was granted late at night. Thanks to the dedication and devotion by immediate Past President, Senior Advocate Dr. Saraf and his team that a writ petition was prepared overnight as the hearing was fixed on Saturday 1st February at 9.30 am. Inputs about practical aspects received from the members were forwarded by me to Dr. Saraf and final PIL was ready. The Hon’ble Chief Justice of Gauhati High Court heard the petition, however, since the Government had extended the time by few days, the matter was adjourned to Tuesday, 4th February after detailed hearing of the submissions made by Dr. Saraf. The Hon’ble Chief Justice of Guwahati High Court directed submitting a representation by AIFTP on e-mail to the concerned authorities, seeking extension of time by 30 days. The Hon’ble Court directed the authority to consider the extension of time by one month for north-east region. The Court having jurisdiction in north-east region could not have directed to have extension throughout the region. The Indirect Taxes Committee headed by Shri H. L. Madan prepared and uploaded a representation on the same day. The members are aware, thereafter, Rajasthan High Court and Madras High Court passed similar orders.

Although the time is extended by a few days and majority may have complied with the filing of Form-9 & audit report in Form-9C, the fact remains there is complete failure on the part of the authorities to take care of the technical glitches to which the attention was drawn by various emails from the tax payers. The problem continues today also. The chairman of the West Zone, Shri Bhaskar Patel and his team had a silent protest against the technical glitches before the Principal Chief Commissioner CGST, Ahmedabad along with the other local organizations on 18th February 2020. While I am writing this, the Chief Commissioner has invited our Chairman and heads of other other local associations to amicably look into the technical problems.

The month of February started with the budget presentation by the Hon’ble Finance Minister. Numerous amendments under the Direct Taxes are critically evaluated by our team of Direct Tax Representation Committee. Detailed representation is sent by the Committee on the amendment to the Income Tax Act and also on the ‘Vivad se Vishwas’ scheme. The representation made by the Federation on Direct & Indirect Taxes would be uploaded on the AIFTP website. The members can refer to the same.

As regards representation under the Indirect Tax, the Chairman of the Indirect Taxes Committee, Shri H. L. Madan has submitted a detailed representation on GST. In addition, when the Hon’ble Finance Minister, Shri Nirmala Seetharaman, personally visited Hyderabad, a representation is made by the Vice Chairman-Indirect Tax Committee, Shri S. S. Satyanarayan. One more representation was given by the Dy. President Shri Seethapathi Rao, along with past president Shri M. V. K. Moorthy.

A writ petition challenging the provisions of GST is filed at Telengana High Court. The interim directions are sought for enabling known filers of GSTR-9 & 9C to file the same without payment of late fee in view of the order no. 1/2020 GST dated 7th February 2020 extending the due date of GSTR-1 till 31-03-2020. A speaking order is expected shortly.

One more important issue which needs immediate attention is the move by the Government to appoint the Hon’ble Member of ITAT for a fixed tenure of 4 years. AIFTP has in past two occasions strongly opposed this move. Our past president, Dr. K. Shivaram in consultation with the Office Bearers will look into the modalities of challenging this provision.

I am happy to inform that the membership of the AIFTP has crossed the mark of 8,500. The National Executive Committee in its meeting on 8th February 2020 has decided to postpone the increase in subscription fees from ₹ 2,500/- to ₹ 5,000/- till 1st April 2020. I am sure, we will be able to many more members by that time.

Meanwhile, the zones are busy organizing the study circles and one-day seminars at different places. On 6th March 2020, a one-day seminar on Direct & Indirect Taxes is organized at Junagadh by West Zone.

The journal in your hand is a budget special issue with critical analysis of each and every aspect of the budget. I must put on record the special efforts put in by the Assistant Editor, Shri Nisit Gandhi in designing this budget special issue. I thank all the contributors for their critical analysis of the various aspects of the budget.

I invite all of you to attend the next two-day conference which is scheduled to take place at Mahabaleswar on 11th & 12th April 2020 along with the National Executive Committee Meeting. Mahabaleswar is a hill station around 2 hours drive from Pune.

Regards,

Nikita R. Badheka
 National President, AIFTP

19 February 2020

The Finance Bill, 2020

This was the toughest budget of the decade since presented amidst various demands and representations from tax payers in different sectors, especially in the backdrop of a low GDP growth rate and a sluggish economy. Smt. Nirmala Sitharaman, FM created history by delivering the longest budget speech of 165 minutes. It has three basic themes of (i) Aspirational India, (ii) economic development, and (iii) Caring society – with special emphasis on agriculture, health care, solar, education, infrastructure sector, etc.

On personal tax front aiming the middle class, given an option to opt for lower tax rates for income between ₹ 5,00,001 to ₹ 15,00,000 for individuals and HUF on the condition that no deduction or exemption shall be allowed, such as claims under chapter VI-A (LIC, mediclaim, PPF) and of interest on housing loan, depreciation, etc. Similar option given to resident co-operative societies for slashed tax rate at 22% on similar condition that other deductions / exemptions shall not be allowed.

However a very careful evaluation of the option given is advisable since the tax cost may vary from person-to-person. In this process the government has created three more slabs which may make calculations more complicated, than simplification, for individuals/HUF.

The long pending expectation of abolition of dividend distribution tax (DDT) has been fulfilled since this was purely an arbitrary exercise by way of triple taxation. It will leave more money in the hands of companies to distribute to shareholders and at the same time paving the way for FDIs to claim credit for such tax on dividends in their home countries. This will boost FDIs since India now becoming one of the most attractive investment destinations in the world. However the burden of taxation has shifted to shareholders and it could be detrimental to the high income shareholders.

Vivad Se Vishwas’ scheme introduced where tax payers can pay only the core tax to settle the liability of outstanding demand and shall be allowed complete waiver from any interest on such core tax or penalty thereupon. It is a very good and welcome scheme hopefully to be used widely in the country. However, the scheme is only available to those making payments till 31-03-2020 and with some additional amounts till 30-06-2020. Before availing the scheme, a very careful evaluation is advisable of the complexity of issues and of the amounts involved in litigations as well as the merits of the tax demand raised and the strength and weaknesses of succeeding in regular appeals.

It has fallen short of the scheme called “amnesty” but is surely oxygen for several tax payers, who are ready to purchase peace by saving the interests and penalties on disputed tax. It would have been better if a similar scheme as for indirect tax, should have been proposed where the requirement would have been kept at payment of only 30% – 60% of the disputed tax amount rather than 100%.

Tax Audit turnover requirement under Sec. 44AB(a) has been liberalized from ₹ 1 crore to ₹ 5 crore for business but again with a rider that the cash component of total receipts / payments are not more than 5% and Tax Audit Report is to filed one month prior to the due date of filing return of income.

It is proposed that in case an Indian citizen who is not liable to tax in any part of the world, would be now deemed to be a tax resident in India. However, it is clarified that in case of an Indian citizen who becomes deemed resident of India under this provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.

In case of transfer of land or building, if there is a difference up to 10% in the value of consideration and the stamp duty valuation as per ready reckoner (as against 5% earlier), the provisions of Sections 43CA, 50C and 56 shall not apply.

Provisions for taxation of ESOP in start-ups rationalized and deferred to the earliest of 60 months from end of relevant F.Y. or sale of such security or when the employee leaves the organization.

In order to fight corruption and widen transparency, faceless proceedings have been initiated before CIT(A) also and further e-penalty and e-best judgment assessments initiated.

It is a very positive step to include the taxpayer’s charter in the statute which definitely is a confidence building measure.

A simplified GST return has been introduced w.e.f. April 01, 2020. The refund process has also been simplified and fully automated with no human interface. Aadhaar based verification of tax payers introduced to weed out dummy units. In the last two years more than 60 lakh new tax payers have been added.

The power generating companies, start-ups, make in India and consumption issues along with growth have been given special emphasis.

Customs duty reduced on certain inputs and raw materials while it is being revised upward on certain goods which are being manufactured domestically. Duty on cigarettes and other tobacco products increased.

Three major drivers of economic growth are foreign direct investment (FDI), public and private consumption, and exports. There wasn’t any serious effort on the part of Finance Minister’s Budget to boost any one of these.

The Finance Minister indicated that she is betting on growing inflows of net FDI, an all-time high accumulation of foreign exchange reserves (which stood at $457.5 billion in December), and improvement in World Bank’s Ease of Doing Business, which now stands at 63.

The Budget did offer some sops to foreign portfolio investors, such as tax exemptions to sovereign wealth funds that invest in infrastructure and other critical areas. But it is not nearly enough.

While India remains one of the largest recipients of FDI, foreign investments in sectors such as infrastructure are very modest. A primary reason that foreign investors are reluctant to pump in top dollars in infrastructure development in India’s cumbersome land acquisition laws. As long as there is no change in the status quo in that area, FDI in the sector will continue to lag.

Export is another area where the right policies could make India one of the international leaders. Right now, India stands behind even small nations such as Hong Kong and Singapore in this area. For that to change, India’s manufacturing capabilities will have to be upgraded substantially.

The Budget did not outline clear plans to revive troubled sectors such as real estate, financial and automobile manufacturing, which have been adversely affecting the economy. For India to turn the corner these sectors have to perform better and do so fast. Their enhanced performance would help stimulate public and private sector consumption.

Although there were large expectations, such as a sharp cut on personal taxation rates, total abolition of capital gains tax on sale of shares, introduction of an attractive amnesty scheme, promising proposals in mining, manufacturing and real estate / construction sectors, etc. responsible for creating numerous jobs, etc., the task to meet everybody’s expectations was not only difficult but almost impossible. The FM deserves cheers for doing a commendable balancing act in retaining the fiscal deficit to only 3.5% and still targeting the GDP growth at 10% in FY 2020-21 besides affording opportunities of investments in rural and urban sectors, infrastructure and educational / skill development areas and a digital revolution, which appears to be a step forward towards the USD 5 trillion economy by 2025. The introduction of dispute resolution scheme for direct taxes is a win-win situation for both – the tax payer as well as the government; since many times a litigation takes as many as 5 to 10 years or more to conclude.

It appears that under the current stressful economic situation in the country, there cannot be a better effort than the Budget 2020, for which the FM deserves praises.

H. N. Motiwalla
Editor