Important provisions relating to Domestic Tax Finance Bill 2017

Transcription

1 Important provisions relating to Domestic Tax Finance Bill 2017 Chamber of Tax Consultants Pune CA N. C. Hegde March Deloitte Haskins & Sells LLP Presentation title 1 [To edit, click View > Slide Master > Slide Master]

2 Contents.. Corporate tax rates Demonetisation induced measures House property income Business income Capital gains Income from other sources Domestic transfer pricing Trusts TDS and TCS Return of income related Assessment related Penalties Miscellaneous

3 Corporate tax rates

4 Corporate tax rates (1/4) Proposed to be reduced to 25% for domestic company whose total turnover or gross receipt does not exceed INR 50 crore during FY A one-time concessional tax rate for AY Intent is to make the MSME sector competitive and also to encourage firms to migrate to company format Similar to the one-time concessional tax rate of 29% allowed for AY by the Finance Act, 2016 to companies with total turnover not exceeding INR 5 crore during FY Tax rate remains unchanged for other domestic companies (including manufacturing companies satisfying prescribed conditions), LLPs and foreign companies No change in DDT rates Effective DDT rate of 20.36% continues 4

5 Corporate tax rates (2/4) The Finance Act, 2016 also introduced section 115BA allowing an option to a company set up and registered on or after 1 March 2016 to claim a concessional tax rate of 25% (plus applicable surcharge and cess) in respect of its total income for AY and onwards, subject to the following conditions: The company is engaged only in the business of manufacture, related research and distribution of manufactured article Except for section 80JJAA, other deduction is not allowable Depreciation in respect of any block of asset entitled to more than 40% depreciation, is restricted to 40% (Notification No. 103/2016 dated 7 November 2016) The option to avail the lower tax rate should be exercised in the prescribed manner, on or before the due date of filing the company s first return of income The option once exercised, cannot be withdrawn for the same or subsequent AY Any capital gains will be taxable in accordance with the provisions of sections 111A, 112 5

6 Demonetisation induced measures to discourage cash & promote digital economy: Reduced deduction in respect of cash expenditure Lower threshold for permissible cash payments Restriction on cash donations Lower presumptive income for turnover collected through banking channel Restriction on cash transactions & penal consequences

7 Reduced deduction in respect of cash expenditure w.e.f. AY Actual cost of asset for depreciation u/s 32: Expenditure incurred on acquisition of any asset shall be ignored for the purpose of determination of actual cost if payment(s) exceeding INR 10,000 is made in a day otherwise than by an account payee cheque/ draft or use of ECS through a bank account Investment linked capital expenditure u/s 35AD: Capital expenditure in respect of specified business shall exclude any expenditure for which the payment(s) exceeding INR 10,000 is made in a day otherwise than by an account payee cheque/draft or use of ECS through a bank account 7

8 Lower threshold for permissible cash payments - section 40A(3), (3A), (4) w.e.f. AY It is proposed to: reduce the present threshold of cash payments to a person in a single day from INR 20,000 to INR 10,000 reduce the existing threshold of INR 20,000 to INR 10,000 for expenditure claimed in a year, but cash payments made in any subsequent year expand the specified mode of payment to include use of ECS through a bank account Restriction on cash donations u/s 80G Currently, deduction in respect of donation made in cash is allowed only for payments upto INR 10,000. It is proposed to reduce the said limit to INR 2,000 Income deemed at lower rate for receipts, turnover collected through banking channel In respect of total turnover, gross receipts collected through banking channel before the return filing due date, income to be deemed at a lower rate of 6% against 8% as provided under the presumptive income 8 scheme of section 44AD. Applies to AY & onwards

9 Restriction on cash transactions and penal consequences sections 269ST, 271DA It is proposed that no person shall receive an amount of INR 300,000 or more otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account- in aggregate from a person in a day; in respect of a single transaction; or in respect of transactions relating to one event or occasion from a person The said restriction shall not apply to - Government, any banking company, post office savings bank or cooperative bank The transactions of taking or accepting loans, deposits or sum of money receivable for transfer of immovable property (currently, such transactions are restricted by separate provision) Such other persons or class of persons or receipts as may be notified by the Central Government, for reasons to be recorded in writing A penalty equal to the amount received in cash shall be levied on a person who receives such sum, unless it is proved that there was sufficient reason 9 for such contravention

10 Issues Do payments through e-wallets qualify as specified mode of payment? Exceptions on the lines of Rule 6DD are required else withdrawals for household expenses, medical emergencies or even those which are subsequently redeposited in bank, may stand covered Though the intent is to restrict cash transactions, the word amount in section 269ST may be interpreted to include not only sum of money but any transfer of value exceeding INR 3 lakhs The lower rate of 6% in terms of section 44AD may not apply if the receipts are collected through banking channels after the return filing due date 10

11 House property income: Exemption for house property held as stock in trade Restriction on set off of HP loss

12 Exemption for house property held as stock in trade section 23 It is proposed to introduce a new provision to exempt notional income from house property held as stock in trade, where the property or any part is not let out during the whole or part of the year The exemption to be provided only for the period upto one year from the end of the financial year in which certificate of completion of construction of the property is obtained from the competent authority 12

13 Restriction on set off of loss from House property section 71(3A) Existing Proposed Loss on account of house property can be set off against any other head of income in the same year without any limit. Balance unabsorbed loss to be carried forward and set off only against Income from House property (upto next 8 years) Loss on account of house property can be set off only upto INR 200,000 against income under any other head in the same year. Balance unabsorbed loss to be carried forward and set off only against Income from House property (upto next 8 years) Particulars Existing Proposed Rental income 200, ,000 Less: Standard deduction (60,000) (60,000) Less: Interest on house property (600,000) (600,000) Loss on house property (460,000) (460,000) Loss to be set off against income under any other head in same year Amount to be carried forward and set off only against Income from House property (upto next 8 years) 460, ,000 NIL (260,000) 13

14 Business income: Increased threshold for maintenance of books of account SEZ units Start ups Housing projects Presumptive tax assessees Rationalisation of MAT provisions for Ind AS compliant companies Taxation of carbon credits Extended time limit for set off of MAT/ AMT credit Limitation on interest deduction u/s 94B

15 Increased threshold limits for maintenance of books section 44AA In the case of individuals and HUF carrying on business or profession (other than persons engaged in legal, medical, etc.), it is proposed to increase the threshold limits for maintenance of books to: income exceeding INR 2.5 lakhs (earlier INR 1.2 lakhs); and total sales/ turnover/ gross receipts exceeding INR 25 lakhs (earlier INR 10 lakhs) 15

16 Present provisions: The controversy: Proposed provisions: Deduction to SEZ units section 10AA (1/3) Background & proposed amendment: Deduction is allowed in computing the total income of an assessee in respect of profit and gains from SEZ unit, subject to fulfilment of certain conditions Whether deduction is available from the total income of the undertaking or from the total income of the assessee? Courts including the SC in Yokogawa India Ltd. in respect of a similar deduction u/s 10A, have held that deduction is to be allowed at the stage of computing the total income of the undertaking & not at the stage of computing assessee s total income Clarify that: The amount of deduction shall be allowed from the total income of the assessee before giving effect to the provisions of section 10AA; and The deduction in no case shall exceed the said total income 16

17 Deduction to SEZ units section 10AA (2/3) Illustration: Existing position (as upheld by Courts) As per proposed amendment Particulars Amount (INR) Amount (INR) Amount (INR) Amount (INR) SEZ Unit (eligible for 100% deduction) Profit Less : Deduction under section 10AA 100 Nil Non-SEZ Unit (60) (60) Gross Total Income (60) 40 Less : Deduction under Chapter VIA - - Total Income (60) 40 Less : Deduction u/s 10AA - (40) Taxable Income - - Loss to be c/f (60) - 17

18 Deduction to SEZ units section 10AA (3/3) Issue: The amendment is proposed to be introduced by way of an Explanation to section 10AA which starts with the words For the removal of doubts and is effective from 1 April 2018 A question thus arises whether the amended provisions can be applied retrospectively to the ongoing cases as the amendment is clarificatory in nature 18

19 Deduction for start-ups section 80-IAC (1/2) Currently, eligible start ups can claim 100% deduction of profits and gain for eligible business for 3 consecutive assessment years out of 5 years beginning from the year of incorporation It is proposed to extend the said period to 3 consecutive assessment years out of 7 years beginning from the year of incorporation "eligible business" means a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property eligible start-up" means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely: a) it is incorporated on or after 1 April 2016 but before 1 April 2019; b) the total turnover of its business does not exceed INR 25 crore in any of the previous years beginning on or after the 1 April 2016 and ending on the 31 March 2021; and c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government 19

20 Deduction for start-ups section 80-IAC (2/2) Issue: A start-up incorporated in March 2019 would be eligible to claim the deduction for 3 consecutive years out of 7 years until March However, the turnover threshold of INR 25 crores is applicable till March 2021 Clarification is required on the turnover threshold for deduction to be claimed after March

21 Carry forward and set off of loss in case of start-ups section 79 Proposed provisions: Relaxation proposed to eligible start-ups to carry forward and set off the loss against the income of the previous year, irrespective of change in shareholding but subject to the condition that all the shareholders, which held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of the previous year in which such loss is to be set-off. Change in shareholding due to death of shareholder, gift to a relative or merger, demerger of foreign parent, is permitted The loss should be incurred during the period of seven years beginning from the year in which such company is incorporated Issue: The condition that all the shareholders during the year of loss should continue during the year in which the set off is sought to be made, may be practically difficult to achieve as PE investors generally look at a time frame of 3 to 5 years for exit at a higher price. In terms of the proposed provisions, even a single such exit could lead to denial of loss set off 21

22 Relaxation of conditions for tax holiday to promote affordable housing section 80-IBA Currently, 100% deduction can be claimed in respect of profits and gains derived from developing and building certain housing projects subject to fulfillment of specified conditions It is proposed to relax the specified conditions as under: Size of residential unit to be measured using carpet area as against built-up area Restriction of 30 square meters on the size of residential units not to apply to the places located within 25 kms from the municipal limits of Chennai, Delhi, Kolkata and Mumbai Time limit for project completion extended to 5 years from 3 years Issue: Section 80-IBA was introduced vide Finance Act, 2016 w.e.f. A.Y for housing projects that are approved on or after 1 June As the proposed amendment will be effective only from A.Y , there could be litigation on whether the amended provisions will apply only to projects approved on or after 1 April 2017, or also to projects approved between 1 June 2016 and 31 March 2017 As per the Real Estate (Regulation and Development) Act, 2016, carpet area means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment 22

23 Presumptive taxation section 44AD It is proposed to reduce the existing rate of deemed profit of 8% to 6% in respect of total turnover or gross receipts received through account payee cheque or account payee bank draft or use of ECS through a bank account during the previous year or before the due date of filing the return of income The existing rate of deemed profit of 8% shall continue to apply in respect of total turnover or gross receipts received in any other mode It is proposed to exclude eligible assessee opting for presumptive taxation scheme from requirement of audit of books, in case the total sales, total turnover or gross receipts, in business does not exceed INR 2 crore in such previous year The proposed amendment is effective from 1 April 2016 Refer Slide 12 for issues 23

24 Rationalisation of advance tax provisions for professionals under presumptive tax regime sections 211, 234C Provisions relating to single advance tax instalment proposed to be made applicable to professionals declaring income under the presumptive taxation regime u/s 44ADA Consequential amendments proposed under section 234C 24

25 Rationalisation of MAT provisions for Ind AS compliant companies (1/8) The Central Government notified the Ind AS and prescribed the Companies (Indian Accounting Standards) Rules, 2015 which laid down a roadmap for implementation of Ind AS For Ind AS compliant company, the financial statements shall include balance sheet, profit & loss and statement of changes in equity. Further, profit & loss account is bifurcated into two parts: Net profit or loss for the year; Net OCI (including items to be reclassified into profit & loss account in subsequent periods and items not to be reclassified into profit & loss account in subsequent periods) The CBDT constituted a Committee (Lohia Committee) in June 2015 to suggest the framework for computation of MAT liability u/s 115JB for Ind AS compliant companies in the year of adoption & thereafter The Committee submitted two interim reports which were placed before stakeholders for recommendations/ suggestions. The Committee submitted its final report on 22 December

26 Rationalisation of MAT provisions for Ind AS compliant companies (2/8) In view of thereof, it is proposed to amend section 115JB w.e.f. 1 April 2016 Company whose financial statements are drawn up in compliance to Ind AS, the book profit shall be computed in accordance with Explanation 1 to sub-section (2) of section 115JB Additionally, following adjustments are proposed for items recorded in OCI which will not be reclassified to the statement of profit & loss account: To be included in book profits at the time of realisation/ disposal/ retirement - Changes in revaluation surplus of PPE & Intangible assets; and Gains/ losses from investments in equity instruments designated at fair value through OCI All other items (including remeasurements of defined benefit plans) to be included in book profits every year as and when they arise 26

27 Rationalisation of MAT provisions for Ind AS compliant companies (3/8) Adjustments on first time adoption: Following transition adjustments routed through other equity (which will not be reclassified to the profit & loss account) shall be included in book profits at the time of realisation/ disposal/ retirement: Revaluation surplus of assets; Gains or losses from investments in equity instruments designated at fair values through OCI; PPE and Intangibles recorded at fair values; Investments in subsidiary, joint venture or associates recorded at fair values; and Adjustments in relation to cumulative translation differences of foreign operations For all other adjustments made on the transition, including items routed through OCI (other than items subsequently reclassified into the profit & loss account), the transition amount shall be included in book profits of the year of convergence and 4 subsequent years in27 equal instalments

28 Rationalisation of MAT provisions for Ind AS compliant companies (4/8) MAT impact on distributions of non-cash assets to shareholders on demerger accounted at fair values: Additionally, following adjustments to be made in respect of items forming part of profit & loss account of the demerged company increase by the amount debited to the profit & loss on distribution of non-cash assets to shareholders in a demerger accounted at fair values decrease by the amount credited to the profit & loss on distribution of non-cash assets to shareholders in a demerger accounted at fair values In case of a resulting company, where property and liabilities of the undertaking received are recorded at fair values different from values appearing in the books of the demerged company, any change in such value shall be ignored for MAT purposes Lohia Committee was silent on the above adjustments in the interim reports 28

29 Taxation of carbon credits section 115BBG Background: High Courts have observed that carbon credit does not arise from business and is generated due to environmental concerns. Income from its transfer is hence a non taxable capital receipt Proposed provisions: W.e.f. AY , income by way of transfer of carbon credit to be 10% (plus applicable surcharge and education cess) on gross basis Issues: Clarification required as regards: Taxability of such income for years prior to AY

30 Extended time limit for carry forward and set off of MAT/ AMT credit sections 115JAA(3A), 115JD(4) Proposed provisions: Effective 1 April 2018, the time period for carry forward of MAT and AMT credit stands extended from existing 10 assessment years to 15 assessment years Issue: Whether the extended time limit would apply to MAT credit for the AYs (viz. AYs and ) in respect of which the ten year carry forward period expired before AY , but the fifteen year time period is yet to expire? 30

31 Capital gains: Period of holding of immovable property Shift in base year for capital gains computation Clarification on the tax rate applicable to a transfer of private company s shares Additional condition for availing exemption u/s 10(38) Joint Development Agreements section 45(5A) Tax neutral conversion of preference shares into equity shares FMV based taxation of unquoted shares u/s 50CA Expanded scope of long term bonds u/s 54EC

32 Period of holding of immovable property section 2(42A) It is proposed to reduce the period of holding in case of immovable property, being land or building or both, from 36 months to 24 months to qualify as long term capital assets Issue: Whether land or building would include: Leasehold rights Tenancy rights Flats in a co-operative housing society 32

33 Base year to be shifted from 1981 to 2001 for computation of capital gains section 55 Currently, the IT Act provides that in case an asset is acquired before 1 April 1981, the tax payer has an option to take either the FMV of the asset as on 1 April 1981 or the actual cost of the asset, as the cost of acquisition for computing the capital gains on transfer It is proposed to shift the base year for indexation purposes to 1 April 2001 Further, it is proposed that cost of acquisition of an asset acquired before 1 April 2001 shall be allowed to be taken as FMV as on 1 April

34 Transfer of shares of private company Clarification on the amendment made to section 112 by Finance Act, 2016: IT Act provides for concessional tax rate of 10% for long term capital gains arising to a non-resident shareholder from transfer of unlisted securities The concessional rate was applicable from 1 April 2012 There was an uncertainty as to whether the concessional rate of tax is applicable to the transfer of share of a closely held company Finance Act, 2016 amended the provision to provide that the concessional rate is also applicable to transfer of shares of a closely held company The aforesaid amendment was applicable from 1 April 2016 Accordingly, the uncertainty remained about the applicability of the amendment in the intervening period It is proposed that: The concessional rate of tax would also be applicable for closely held company during the intervening period The proposed amendment will be effective from 1 April

35 Additional condition for availing LTCG exemption u/s 10(38) (1/3) Present provisions vs. proposed provisions (w.e.f. AY ): Present provisions Proposed provisions Long term capital gain (LTCG) arising on transfer of listed equity shares is exempt where Transfer of shares is on or after 1 October 2004; and The transaction is subject to securities transaction tax (STT) Exemption u/s be available if: 10(38) would not If the transaction of acquisition of equity shares is entered into on or after 1 October 2004; and Such acquisition is not chargeable to securities transaction tax Acquisitions as may be notified by the Central Government, can continue to claim exemption Anti-abusive measure to prevent misuse of exemption in relation to unaccounted income from sham transactions 35

36 Additional condition for availing LTCG exemption u/s 10(38) (2/3) Issues & observations: May lead to denial of benefit even in cases where the acquisition without payment of STT, was not with the intent of abusing the exemption. Hence a better course may be to specify a negative list of sham transactions which would not be entitled to the exemption The following genuine transactions should be excluded: Shares which get listed pursuant to an IPO/FPO Shares issued under ESOP/ESPS scheme Shares issued or transferred pursuant to corporate restructuring Shares issued on Preferential allotment/qip Shares acquired pursuant to a transaction not regarded as transfer u/s 47 where STT was paid on the underlying shares by the previous owner New shares received on consolidation/ bonus/ rights/ split of existing shares where STT was paid on the underlying shares Off-market share deals where such deal cannot be executed on-market due to pricing restrictions (i.e. transactions which do not meet the bulk deal / block deal parameters) 36

37 Additional condition for availing LTCG exemption u/s 10(38) (3/3) Issues & observations (contd..): Shares acquired pursuant to a family arrangement/ settlement where STT was paid on the underlying shares by the previous owner Acquisition of shares on which STT was paid by way of transmission, succession or inheritance Contribution of shares to LLP/ Partnership firm Transfer within the promoter group which is in compliance with Takeover Code or subject to SEBI approval 37

38 Joint Development Agreements sections 45(5A), 49, 194-IC (1/7) JDA Salient features: An agreement wherein a land owner contributes land & a developer constructs property thereon at his own cost The land owner executes a General Power of Attorney (GPA) in favor of the developer for development purpose Benefits are shared on agreed terms, i.e. the landowner typically receives (monetary consideration + a portion of the constructed property) & the developer sells the balance constructed area The agreement is spread over a period of time and contemplates various stages 38

39 Joint Development Agreements sections 45(5A), 49, 194-IC (2/7) Present provisions section 45 r.w.s. 2(47): Section 45 Charging provision Except for specified cases, capital gain is chargeable to tax in the year in which transfer takes place Section 2(47)(v) transfer includes Allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 Capital gains tax liability for the land owner in the year in which the possession of the land is handed over to the developer 39

40 Joint Development Agreements sections 45(5A), 49, 194-IC (3/7) The controversy: What would be the taxable event for the land owner i.e. whether it would be the date of: Execution of the JDA; or Execution of the GPA in the developer s favor; or Handing over the possession for pre-construction survey, etc.; or Obtaining requisite approvals from concerned authorities; or Handing over the possession for the actual development work; or Execution of conveyance deed; or Receipt of consideration by the landowner Varied positions are adopted by the tax authorities, leading to considerable litigation 40

41 Joint Development Agreements sections 45(5A), 49, 194-IC (4/7) The controversy (contd..): Some judicial precedents: Chaturbhuj Dwarkadas Kapadia [2003](260 ITR 491)(Bom HC): The year of execution of the JDA would be the taxable event Jasbir Singh Sarkaria [2007](294 ITR 196)(AAR): Date of execution of irrevocable GPA, allowing builder to take possession in part performance, relevant to decide date of transfer Ajay Kumar Shah Jagati [2008](215 CTR 396)(SC), Geetadevi Pasari [2009](17 DTR 280)(Bom HC): Possession is an essential element in deciding whether a transfer in terms of section 2(47)(v) had taken place Smt. Najoo Dara Deboo [2013](218 Taxman 473)(All HC): Capital gains would be charged only on receipt of sale consideration and not when JDA was signed C.S. Atwal [2015](378 ITR 244)(P&H HC): There was no transfer where the JDA was not registered Jawaharlal L. Agicha [2017](183 TTJ 176)(Mum ITAT): In the absence of parting of possession and registration of the JDA, there was no transfer within the meaning of section 2(47)(v) 41

42 Sections 45(5A), 49, 194-IC Joint Development Agreements sections 45(5A), 49, 194-IC (5/7) Proposed provisions - W.e.f. AY , except section 194-IC which will apply from 1 April 2017: Applies to an individual or HUF transferring land and/or building under a registered JDA Capital gain would be taxable in the year in which competent authority issues certificate of completion (COC) of the whole or part project Full value of consideration = Stamp duty value of share in the project on the date of COC issuance + Any cash consideration Proposed provisions will not apply if share in the project is transferred on or before the date of COC. In such case, section 45(1) r.w.s. 48 will apply 10% would apply on the monetary consideration under JDA The full value of consideration shall be deemed as the landowner s cost of share in the project 42

43 Joint Development Agreements sections 45(5A), 49, 194-IC (6/7) Issues & observations: The proposed amendment applies only to individuals & HUF. As the hardship sought to be minimized is common to all the assessees, this scope restriction may largely defeat the intent Will the proposed provision apply to Transferable Development Rights (TDR) transferred under a JDA, despite Courts ruling that sale of TDR is not liable to capital gains tax? The entire capital gains would be taxed in the year in which the project COC is obtained, even when the COC is for part project only Transfer of even a part share in the project before the date of issuance of COC will make the entire transaction taxable in the year of transfer itself. This may cause genuine difficulty, particularly in case of long term or delayed projects 43

44 Joint Development Agreements sections 45(5A), 49, 194-IC (7/7) Issues & observations (contd..): Converting project share into stock-in-trade before issuance of COC amounts to a transfer, and may also lead to denial of tax deferral The proposed provision though similar to the existing section 50C, does not contain the safeguards therein, eg: section 50C provides for reference to a Valuation Officer if the assessee claims that the stamp duty value exceeds the FMV of the property as on the date of transfer. However, the same is not provided for in the proposed section 45(5A) 44

45 Tax neutral conversion of preference shares into equity shares - sections 47(xb), 2(42A), 49(2AE) Currently, conversion of bond or debenture of a company into shares of that company is not regarded as transfer However, no similar tax exemption was available in case of conversion of preference shares of a company into its equity shares It is proposed that the conversion of preference share of a company into equity share of that company will not be regarded as transfer In determining the period of holding of such equity shares, the period of holding of the preference shares shall be included The cost of acquisition of the converted equity shares shall be deemed to be the cost of acquisition of preference share 45

46 FMV based taxation of unquoted shares section 50CA (1/4) Background: Currently, an anti-abuse measure is contained in section 50C which provides that if land or building or both is transferred for a consideration which is lower than the value adopted or assessed by the State Government authority for payment of stamp duty, then such assessed value shall be deemed to be the full value of consideration for the purposes of section 48 The proposed amendment is another anti-abuse measure to provide for levy of Fair Market Value (FMV) based capital gains tax on transfer of unquoted shares in cases where the sale consideration is lower than such FMV 46

47 FMV based taxation of unquoted shares section 50CA (2/4) Proposed provisions w.e.f. AY : If sale price of unquoted shares < prescribed FMV, FMV shall be deemed as full value of consideration Quoted share means share quoted on any recognised stock exchange with regularity from time to time, where the quotation is based on current transaction made in ordinary business course Manner of determination of FMV to be prescribed 47

48 FMV based taxation of unquoted shares section 50CA (3/4) Issues: Constitutionally valid? Whether understatement by the assessee is a pre-requisite? What would constitute trading regularity for the shares to be covered u/s 50CA? Whether applies to: preference shares shares held as stock-in-trade shares of a foreign Co/ foreign entity options in shares unquoted shares transferred in a slump sale What would be the position when the consideration: is in kind cannot be determined is separate for controlling interest is NIL 48

49 FMV based taxation of unquoted shares section 50CA (4/4) Issues (contd..): Does it cover a gift or other transfers exempt u/s 47? If the transferee has suffered taxation u/s 56, can double taxation be avoided based on a logical conclusion of the deeming fiction? Will the proposed provision have a bearing on indirect transfers? Will it override transfers covered by other specific provisions like sections 45(2), 45(3), 45(4), 46(2), etc.? What would be the position if the manner of determining FMV u/s 50CA is different from the methodology prescribed u/s 56? 49

50 Expanded scope of long term bonds u/s 54EC Currently long term capital gain to the extent of INR 50 lakhs is exempt on investing such gain in the bonds issued by National Highways Authority of India or by the Rural Electrification Corporation Limited. Such exemption is now proposed to be extended to any bond redeemable after 3 years (notified by Central Government in this behalf) 50

51 Income from other sources: Widened scope section 56(2)(x) Dividend income exceeding INR 10 lakhs Disallowance of expense on failure to deduct TDS

52 Widened scope section 56(2)(x) (1/4) Present provisions: The following anti-abuse provisions are currently in force to prevent the practice of receiving money or property without consideration or for inadequate consideration Section 56(2)(vii) Individual/HUFs taxable if any sum of money or property received without or for inadequate consideration in excess of INR Section 56(2)(viia) Firm or closely held companies taxable on receipt of shares of a closely held company if the same is without or for inadequate consideration in excess of INR 50,000 52

53 Widened scope section 56(2)(x) (2/4) Proposed provisions W.e.f. AY : The applicability of the present provisions has been limited till 31 March 2017 and it is proposed that any receipt of money and/or property (exceeding INR50,000) by all assessees would be taxable as income from other sources. Key features are: Tax net extended to all assessees. Includes: Firms, LLP, AOP, BOI Discretionary trusts Non-resident assessees Property to have the same meaning as the present provisions, includes: Immovable property, shares, jewellery, paintings, art, etc. In addition to the exclusions under present section 56(2)(vii), the following is also not taxable: Distribution on HUF partition Corporate reorganisations exempt u/s 47 It is also proposed to amend section 49(4) to provide for cost step-up in respect of the amount taxed u/s 56(2)(x) 53

54 Widened scope section 56(2)(x) (3/4) Issues & observations: The definition of income u/s 2(24) has not been amended to include a reference to the proposed section 56(2)(x). Hence it is possible to argue that the charge fails as gift is a capital receipt Carve-outs ought are required in respect of transactions that are either exempt under the Act, or have been judicially upheld as nontaxable, illustratively: Transfer of capital asset under a will or an irrevocable trust Transfer of capital asset by a company to its wholly-owned subsidiary, or vice versa, where transferee is an Indian company Indirect transfer of capital asset pursuant to amalgamation or demerger of foreign companies Indirect transfer or issue of shares to the shareholder pursuant to amalgamation or demerger of foreign companies Receipt of shares or debentures on conversion of bonds or debentures, debenture-stock or deposit certificates in any form Receipt of equity shares on conversion of preference shares Receipt of shares or debentures on conversion of FCCB / GDR purchased in foreign currency Transfer of capital asset on succession of business of a firm by a company 54

55 Widened scope section 56(2)(x) (4/4) Issues & observations (contd..): Transfer of capital asset on conversion of a company into an LLP Transfer of capital asset on succession of business of a proprietary concern by a company Subvention or assistance by a parent company to its subsidiary for recoupment of financial losses; Distribution to beneficiaries on dissolution of trust Property settled in a trust The existing provisions of section 56(2)(viia) cover shares of closely held company. However, proposed section 56(2)(x) covers any share or security 55

56 Taxation of dividend exceeding INR 10 lakhs sections 115BBDA, 234C (1/3) Present provisions: An individual, HUF or a firm, being resident in India, is 10% on dividend income exceeding INR 10 lakhs i.e. the provisions presently apply only to resident individuals, HUF and firms including LLPs Further, section 115BBDA(2) prohibits deduction of expenses relating to the taxable dividend income exceeding INR 10 lakhs Proposed provisions: Would now apply to all resident assessees except: Domestic company; Funds, educational institutions, trusts, etc. referred to in sections 10(23C) and 12AA Interest u/s 234C not to be levied on shortfall of advance tax resulting from under-estimate or failure to estimate dividend income taxable u/s 115BBDA, subject to specified conditions 56

57 Taxation of dividend exceeding INR 10 lakhs sections 115BBDA, 234C (2/3) Issues: The expenses relating to dividend income up to INR 10 lakhs that is exempt u/s 10(34), are disallowable u/s 14A. Further, the expenses incurred for earning the taxable dividend income beyond INR 10 lacs are disallowable u/s 115BBDA(2) There could hence be an overlap and clarity is required on the manner of calculating disallowance u/s 14A read with Rule 8D and u/s 115BBDA(2) Eg: Mr. X has paid a fee of Rs. 75,000 for investment advisory services. The annual average of monthly average of the opening and closing balance of value of shares held by Mr. X is Rs. 10 crore During the year, Mr. X has earned dividend income of Rs. 25 lacs from 3 out of the 5 companies in which he holds investments Dividend of Rs. 10 lakhs will be exempt u/s 14A and dividend of Rs. 25 lakhs will be taxable u/s 115BBDA(1) 57

58 Taxation of dividend exceeding INR 10 lakhs sections 115BBDA, 234C (3/3) Issues (contd..): The following aspects merit consideration in Mr. X s case: Can the investment advisory fee of Rs.75,000 be said to be directly relating to income which does not form part of total income, especially when dividend was received from only 3 out of the 5 companies in which Mr. X had invested? How is the disallowance to be determined considering that dividend income of Rs.15 lakhs would form part of Mr. X s total income in terms of section 115BBDA(1)? Would disallowance u/s 115BBDA(2) be attracted even in a case where Mr. X is a dealer in shares and the investments constitute stock-in-trade? 58

59 Disallowance of expense on failure to deduct TDS - section 58 Existing provision of disallowance of 30% of sum payable to a resident for not complying with the TDS provisions while computing income chargeable under the head profit and gains of business or profession is proposed to be extended to computation of income under the head income from other sources Deduction shall be allowed in the year in which the default is regularized 59

60 Trusts: Corpus donations to other trusts, not an application of income Fresh registration required on modification of objects Exemption conditional upon timely filing of return of income

61 Corpus donation to other trusts not to be treated as application of income section 11 Under the existing provision, donations (except donations made out of accumulated income) by a trust or institution to any other trust or institution is considered as application of income for the purposes of its objects It is proposed that corpus donation made by a trust or institution to any other trust or institution shall not be treated as application of income Issue: This may lead to hardship for genuine cases where the funds are actually utilized by the donee trust. Alternative measures like prescribing a reasonable time frame for utilization by the donee, may be better 61

62 Procedural clarification in respect of modification of object and filing of tax return section 12A It is proposed to introduce a new provision whereby an exempt trust shall be required to obtain a fresh registration in case of modifications in the objects after initial registration has been granted Application to be made within 30 days of modification The amendment is clarificatory in nature The proposed amendment appears to be pursuant to section 115TD which provides for an exit tax when a trust converts into a noncharitable institution. The said section provides that a modification of objects which does not confirm with the conditions of registration, shall be deemed as conversion into a non-charitable institution if fresh registration is not obtained It is proposed to introduce a clarification to provide an additional condition of filing the return of income within the prescribed time line for availing the exemptions under sections 11 and 12 62

63 Domestic transfer pricing

64 Specified domestic transaction section 92BA Regulations for specified domestic transaction rationalized Definition of specified domestic transaction has been relaxed to exclude expenditure in respect of which payment has been made or to be made to certain specified persons This change will be effective from 1 April 2017 and will apply for AY and onwards However, transfer pricing regulations in respect of transactions between related parties enjoying specified profit linked deductions, will continue to apply This will reduce compliance burden 64

65 TDS and TCS: TDS on rent paid by individual, HUF section 194-IB Changes in TDS rates TCS Interest on refund arising to the tax deductor

66 TDS on rent paid by individual and HUF section 194-IB (w.e.f 1 June 2017) (1/2) Compliance The deductor is not required to obtain TAN. The deductor is liable to deduct tax only once in last month of the previous year (or last month of tenancy if the property is vacated during the year) Rate of tax to be deducted 5% of total rent paid Who will deduct? Limit above which TDS is applicable Amount exceeding INR 50,000 per month. Individuals or HUF (other than those who are liable to tax audit under section 44AB of the Act) paying rent to a resident individual 66

67 TDS on rent paid by individual and HUF section 194-IB (w.e.f 1 June 2017) (2/2) It is also proposed to provide that where the tax is required to be deducted as per the provisions of section 206AA, such deduction shall not exceed the amount of rent payable for the last month of the previous year or the last month of the tenancy, as be the case Issues: Clarity required on the amount on which tax needs to be deducted u/s 194-IB in case the monthly rent has been increased during the year and the amount of rent per month before such increment was less than Rs 50,000. In the said scenario, would tax have to be deducted on the rent paid during the entire previous year although the rent per month for some of the months is less than Rs.50,000 or whether the tax needs to be deducted on the aggregate amount of rent for the months when rent exceeded Rs.50,000 per month? As the deductor shall be liable to deduct tax only once in a previous year, simple compliance measures (in line with section 194-IA) would be preferred 67

68 Changes in withholding tax rates Section Particulars Existing Rate Proposed Rate Effective from 194J Fees for professional or technical services 10% 2% for recipients engaged only in the business of operation of call centre 1 June LA Payment of compensation on acquisition of certain immovable property 10% Nil where the payment is exempt from levy of income-tax under the RFCTLARR Act 1 April

69 Tax collection at source Cash sale of jewelry section 206C Cash sale of jewelry exceeding INR 5 lakhs is currently subject to TCS at 1% The above provision is proposed to be omitted in view of insertion of new provisions restricting cash receipts of INR 3 lakhs or more Sale of a motor vehicle section 206C Sale of motor vehicle of value exceeding INR 10 lakhs is currently subject to TCS at 1% It is proposed to exempt specified classes of buyers, the Central Government, State Government, an Embassy, a High Commission, etc., from the above levy Higher TCS in absence of PAN section 206CC A new section 206CC proposed to be inserted (similar to section 206AA in respect of TDS) If a person paying any sum on which tax is collectible at source does not furnish PAN to the recipient, tax shall be collected at the higher of the following rates Twice the rate specified in the relevant provision; or 5% Declaration for NIL TCS not to be considered as valid in absence of PAN Lower TCS certificate not to be granted unless the application contains PAN Proposed amendment not applicable to a non-resident not having PE in India 69

70 Interest on refund arising to the tax deductor section 244A(1B) Currently, the assessee is entitled to receive interest on refund arising out of excess payment of advance tax, TDS, TCS or other tax payments It is proposed to grant interest on refund arising to the tax deductor- In case of claim for refund made in the prescribed form ~ from the date such claim to the date on which refund is granted In case of an order passed in appeal ~ from the date on which the tax is paid to the date on which refund is granted The proposed amendment is effective from 1 April

71 Return of income related: Reduced time for revision of return of income Fee u/s 234F for delay in return filing

72 Reduced time for revision of return of income section 139(5) It is proposed that a return of income may be revised upto the end of the relevant assessment year instead of the present provisions which allow a time frame of one year from the end of the relevant assessment year Revised limitation applies to returns for assessment year and subsequent years Return of income for assessment year can be revised upto 31 March

73 Fee for delay in filing the return of income section 234F It is proposed to levy fee for delay in filing the return of income after the prescribed due dates: INR 5,000 ~ if return is filed on or before 31 December of the assessment year INR 1,000 ~ if total income does not exceed INR 500,000 INR 10,000 ~ any other case Current penalty of INR 5,000 u/s 271F for failure to file return of income before the end of the relevant AY will not be applicable It is proposed to amend provisions relating to self-assessment tax to include that in case of delayed filing of return of income, the assessee shall be required to pay a fee for delay along with the tax and interest payable Further, while processing the return, the fee for delay shall also be considered in computation of amount payable or refund due 73

74 Assessment related: Search & seizure Extension of power of survey Revised time limits for completion of assessment, reassessments

75 Search and seizure (1/3) Where an authority has 'reason to believe' or 'reason to suspect' of circumstances referred to in sections 132(1), 132(1A) and section 132A of the Act based on the information in his possession, he may authorise: Search and seizure Requisition from some other officer or authority to deliver books of account, documents or assets of the assessee It is clarified by way of an explanation to the respective sections that reason to believe or reason to suspect recorded by the authority shall not be disclosed to any person, authority or Appellate Tribunal The amendments will be effective retrospectively from the date of enactment of the provisions i.e. from 1 April 1962 in case of section 132(1) of the Act and from 1 October 1975 in case of section 132(1A) and 132A of the Act 75

76 Search and seizure (2/3) It is proposed that authorised officer may provisionally attach any property belonging to the assessee during the course of a search or seizure; or within a period of 60 days from the date on which the last of the authorisations for search was executed, with the prior approval Such provisional attachment shall not have effect after the expiry of 6 months from the date of order of such attachment It is further proposed that the authorised officer may make a reference to a Valuation Officer for estimation of FMV of a property (undisclosed income held in the form of investment or property) Valuation Officer to furnish the valuation report within 60 days of receipt of such reference 76

77 Search and seizure (3/3) It is proposed to increase the period for which search may be conducted or requisition may be made, from existing 6 years preceding the assessment year relevant to the previous year to 10 years, subject to the following: AO is in possession of books or documents or evidence which reveal that the income escaping assessment may be INR 50 lakhs or more; Such income escaping assessment is in the form of an asset; The income escaping assessment or part thereof relates to the additional 4 years; Such search or requisition is initiated on or after 1 April

78 Extension of power of survey The tax authorities have the power to enter any place, at which a business or profession is carried on, or at which any books of account or other documents or any part of cash or stock or other valuable article or thing relating to the business or profession are kept, for the purposes of conducting a survey It is proposed to widen the scope to include any place at which an activity for charitable purpose is carried on The amendment will be effective from 1 April

79 Time limit for completion of assessment proceedings (1/2) It has been proposed to amend the time limit for completion of assessment proceedings as under: Existing 21 months from the end of the assessment year in which income was assessable Proposed in respect of assessment year months from the end of the assessment year in which income was assessable (i.e. by 30 September 2020) Proposed in respect of assessment year months from the end of the assessment year in which income was assessable (i.e. by 31 March 2021) The aforesaid changes in the time limit of completion of assessment are also proposed to be applicable for passing an order in case of search or requisition cases conducted in financial year and

80 Time limit for completion of assessment proceedings (2/2) Particulars Existing Proposed Time limit for completion of reassessment proceedings Time limit for making an order of fresh assessment pursuant to orders passed or received Time limit for giving effect to orders passed 9 months from end of financial year in which notice under section 148 of the Act is served 9 months from end of financial year in which order is received 9 months from end of financial year in which order is passed 12 months from end of financial year in which notice under section 148 of the Act is served 12 months from end of financial year in which order is received 12 months from end of financial year in which order is passed Additional conditions Applicable to notice under section 148 of the Act served on or after 1 April 2019 Orders passed or received in financial year and onwards Applicable where verification of any issue is required or where an opportunity to be heard is to be provided to the assessee Effective from 1 April