Highlights of Easwar Committee s Draft Report on Income Tax Law Simplification in India

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1 Highlights of Easwar Committee s Draft Report on Income Tax Law Simplification in India Executive Summary India is leaving no stone unturned to simplify the tax situation. Recently formed Easwar Committee, submitted its first report which clearly talks about the positive move of the government to simplify tax situation in India. On 15 th Jan, 2016 Easwar committee submitted its first set of recommendations for ensuring simplification of Income tax laws in India. The report depicted various provisions of Income-tax Act, 1961 which are needed to be amended in order to reduce the high quantum of litigations that are arisen due to interpretative differences between the taxpayers and the revenue authorities and the recommendations to eliminate such interpretative differences. The report provided recommendations regarding certain simpler but most common issues that are faced by the judicial authorities during the Income tax litigations. However, the report didn t discuss those issues that are complex and need greater time for analysis. The issues that were discussed in the report were as follows:- Provisions related to TDS were discussed by the committee member in details and a lot of amendments are recommended which include upward revision in threshold limit for tax deduction, change in rates of tax deduction, deletion of some irrelevant sections and merger of sections related to same type of incomes. It also discussed certain most common issues like disallowance under section 14A and characterization of shares and securities as capital asset. Many other domestic issues were also discussed that may be modified or amended for simplifying the Income tax laws in India. A brief light was also thrown over the provisions related to non-residents in India and it was observed that the Tax laws in India ought to be simpler to attract more non-residents for doing business in the country. Such recommendations include: Specifying some substitutes of PAN to exempt the non-residents from applicability of higher TDS rate in absence of PAN; Relaxation in terms of attesting requirements relating to PAN application forms Simpler provisions and reduced rates for TDS deduction of Non-residents.

2 The highlights of the report are provided below: Introduction: A ten member committee was constituted vide notification no. A.50050/112/2015-Ad.I dated 27 th October, 2015 under the chairmanship of Justice R.V. Easwar having the following objectives:- To identify those phrases of Income-tax act which have give rise to litigations on account of interpretative differences; To identify those provisions which impact the ease of doing business; To identify the provisions of the act for simplification in the light of existing jurisprudence; To suggest alternatives or modifications with a view to ensuring certainty and predictability in tax laws without substantially impacting the tax base or revenue collections. Draft Report: 15 th Jan, 2016 The recommendations are divided in two parts; 1) those provisions requiring amendments to the act and 2) those which can be implemented through issues of circulars etc. Part 1: Recommendations requiring Statutory Amendments: Section 2(14) Section 2(14) defines the term Capital Asset for the purpose of calculating income from Capital Gains under Income Tax Act This section also provides a list of assets that are expressly excluded from the scope of the Capital Assets. The Act does not provide any specific guidelines as to the characterization of any particular investment as capital asset or stock-in-trade/trading asset. Some clarity should be provided that will bring in certainty and thus will reduce the litigations. The committee recommended that a new clause must be provided to clarify that capital asset shall include shares and securities held by an assessee for a period exceeding 12 months other than those declared as trading assets. Section 14A Section 14A provides that, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The committee observed that about 15% of the litigations are relating to the issue regarding disallowance of expenditure incurred to earn exempt income. There are instances where the disallowances as computed according to a prescribed formula exceed the total amount of expenditure claimed in the return or even the amount of exempt income. Also the definition of exempt income is not properly drafted.

3 The committee recommended appropriate amendments for solving these issues providing that the definition of exempt income must reflect the principle of economic taxation and income such as dividends and profit share from partnership firms should not be treated as exempt income. TDS Provisions The committee has focused largely on the provisions of TDS; the recommendations by the committee are listed below: To merge sections 193 and 194A under a separate head namely, interest income; raise the threshold limit for deduction to INR 15000/- and reducing rate of TDS to 5% in specified cases. To merge sections 194B and 194BB under a separate head namely, Income from winnings and to raise the threshold limit to INR 15000/-. For section 194C, increase the aggregate annual limit to INR /- and to delete the separate transaction limit. To club sections 194D, 194G and 194H under the head Commission income and a uniform rate of 5% to be applied. To club sections 194E, 194LB, 194LBA, 194LC and 194LD under a separate head in name of Payment to Non-Residents and to reduce TDS rate to 5% except for 194E. To delete sections 194F, 194K and 194L since not relevant now. To increase threshold limit for deducting tax on compensation for compulsory acquisition to INR /-. To increase threshold limit for deducting tax on rent payments to INR /-. To increase threshold limit for deducting tax on professional or technical fee payments to INR 50000/-. To increase threshold limit for deducting tax on payments in respect to NSS deposits to INR 15000/- and reduce the tax rate to 5% Exemption of non-residents having TIN from applicability of TDS at higher rates [section 206AA] This section provides that TDS is required to be deducted at a higher rate where the deductee does not furnish his permanent account number [PAN]. The committee observed that many non-residents prefer not to do business with the Indian residents if obtaining of PAN is insisted from the Indian residents. Thus it is recommended that it should suffice if the concerned non-resident in lieu of such PAN provides his TIN in the country or specified territory of residence or in case of unavailability of TIN a unique number on the basis of which the person is identified by the government of that country. Other Recommendations: To merge section 44AA and 44AB to bring an alignment between the persons who are required to maintain books of accounts and who are required to get them audited. The committee also recommended that the threshold limit for getting book audited requires upward revision i.e.

4 turnover exceeding 2 crore rupees in case of persons carrying on businesses and 1 crore Rupees in case of professionals. To increase the eligibility under the presumptive scheme for small businesses from One Crore to Two Crore Rupees. To introduce a presumptive income scheme for professional whose turnover in the relevant year do not exceed One Crore rupees. Such presumptive income shall be estimated to be one third of total receipts during the year. To provide a relief to assessee under section 50C where sale consideration was already fixed under agreement to sell much before the actual date of the transfer of such asset. In such case the value of property for the purpose of payment of stamp duty shall be taken as on the date of such agreement. Deletion of section 56(2)(vii)(b)(ii)- this section deals with transfer of immovable property without any consideration from any person to any individual or Hindu Undivided family, where the stamp duty value is less than fifty thousand rupees for calculation for capital gain or loss for that particular transaction. Deletion of section 143(1D) (Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed after making any adjustments i.e., any arithmetical error in the return; or(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return) avoiding undesirable delay in issue of refunds To provide an opportunity to the assessee to make fresh claim during the assessment proceedings without need of filing a revised return. However, such claim shall be subject to verification and shall be submitted in a prescribed form. The committee recommended deferring of applicability of Income Computation and Disclosure Standards [ICDS] demanding some more time for the taxpayers to deal with this change. Recommendations for amending rules 28, 28AA and 28AB to resolve practical difficulties faced by persons granted certificates for lower deduction of tax. Amendments in rule 30 and 31 in relation to time and mode of payments of TDS and filing of statement of TDS proposes to increase the time limit allowed to assessee for deducting, depositing or filing statement of TDS. To provide relief under section 234C where the assessee is assessed for the first time under the head Profits and gains of Business or Profession. To reduce the penal fee for default in furnishing statement of TDS and TCS from INR 200/- per day to INR 100/- per day [Section 234E]. To provide timely refund payment with interest and also payment of higher interest in case refund is delayed for compensating opportunity cost of taxpayers. To amend section 245 to rationalize provisions regarding set-off of refund due to assessee.

5 To reduce time for rectification of mistake by the tribunal from 4 years period to a time of 120 days. It is also recommended to allow a single member bench to dispose of appeals where in assessed income is less than 30 Lakhs instead of 15 Lakhs as provided before. To prescribe time limits of one year for disposal of petitions for waiver of penalty and interest under sections 273A, 273AA and 220(2A). To enlarge the scope of section 273B providing that penalty for concealment of income will not be imposed where additions are made without evidence or in routine manner or on basis of estimates or on account of different interpretations of any provision. Part 2: Recommendations for reforms through administrative instructions Issue of Pan to Non-Residents The Non-residents face practical difficulties in getting the documents attested by the consular authorities. Sometimes, the Indian Embassy may be located far away from the residence of Nonresidents. The committee recommended that the non-residents may be allowed to self attest the documents for issuance of PAN. E-governance The company recommended that the government should aim to complete most of the taxation processes electronically to eliminate human interface. The committee also agreed that all communication to and from tax department should be undertaken electronically. The IT softwares are also needed to be strengthened. Amendment of return form The committee proposed to amend the return form to provide column for making appropriate disclosures. The committee proposed that such amendments shall make it possible for the assessee to provide any bona fide views which were taken while filing the return. Such disclosures shall reduce the litigations related to impositions of penalties under the provisions of this act. Conclusion The above recommendations are certainly going to simplify the income tax laws of the country to a great extent and shall impact the quantum of litigations in the country significantly. The recommendations have been provided considering the interest of taxpayers and at the same time without prejudice to the revenue interest. It is yet to be seen what the next draft report conceals in it for the taxpayers but if these recommendations are acted upon by the Government; the Income Tax Law in India is going to be much simpler than ever.

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Easwar Committee report on the simplification of various provisions of the Income-tax Act

20 January 2016 Easwar Committee report on the simplification of various provisions of the Income-tax Act In October 2015, the Central Government constituted a committee under the chairmanship of Justice