The Finance Act, 2018 - the finer aspects P a g e 1 The Finance Act, 2018 has been enacted and is operative from April 1, 2018. From live screening to the Finance Bill, 2018 till its enactment and thereafter, the profession has witnessed the transition. Object of this write up is to throw light on certain finer aspects that, at times, escape attention as these changes are not conspicuous or certain aspects thereof need more than little attention. PAN requirement The Finance Act, 2018 has included an amendment that has required all entities and their principal officers (e.g. managing director, director, partner, trustee, author, founder, karta, CEO, principal officer or office bearer or any person competent to act on behalf of such entities, etc.) entering into specified financial transactions that exceed in the aggregate INR 250,000 to obtain a PAN. (The PAN is a 10-digit alphanumeric identity given to a taxpayer by the Indian tax authorities, and is necessary for certain financial transactions.) This proposal created concerns for foreign entities because the foreign entity and its directors and partners would have had to obtain a PAN if the entity engaged in any business transaction with India. The parliament clarified the language to specify that only resident Indian entities will have to obtain a PAN. Deemed Dividend Deemed Dividend Section 115-O and related sections have been amended in order to provide that dividends referred to in Section 2(22)(e) of the Act are also part of Section 115-O and chargeable to DDT @ 30% (instead of 20.5553%). However, no change has been made in Section 115BBDA and Section 10(34) of the Act. Post Amendment, It can be inferred that: Deemed Dividend u/s 2(22)(e) is chargeable to DDT @ 30% in hands of closely held co. Since Section 115BBDA of the Act do not cover above dividend, hence the same is wholly exempt from tax under Section 10(34) of the Act even exceeds Rs. 10 lakhs. TDS under Section 194 of the Act is not required to be deducted since such dividend is now covered under Section 115-O of the Act. Retrograde Taxation Provisions Clarification in sub-section 2 of section 115BBE has been inserted.
P a g e 2 Clause (a) of Section 115BBE of the Income-tax Act provided for levy of tax at the rate of 60% on income referred to in elating to unexplained income referred to section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and reflected in the return of income filed under section 139(1). Clause (b) relates to unexplained income referred to in the above sections which have been determined by the assessing officer and not covered under Clause (a) above). Sub-section (2) starting with a non-obstante clause provides that no deduction in respect of any expenses or allowances or set-off of any loss shall be allowed to the assessee under any provision of this Act in computing his income referred to in Clause (a) of sub-section (1) referred to above. This bar on non-deduction of expenditure or allowance or set-off of any loss was applicable only to Clause (a) and not to Clause (b). Therefore, in a case where the assessing officer himself charges tax on income referred to in the specified sections (Section 68 to Section 69D), then the assessee was entitled to claim the deductions of expenses or allowances as well as set-off of any loss. This seemed to be an unintentional anomaly. The amendment in Finance Act, 2018 has corrected this anomaly and hence proposes a retrospective amendment w.e.f. 1st April, 2017 to include income referred to in both Clauses (a) and (b) of sub-section (1) in sub-section (2). Such tax rate of 60% will be further increased by 25% surcharge, 6% penalty, i.e., the final tax rate comes out to be 83.25% (including cess). These additions are also enjoined by stiff penalties. However, these changes lead to a retrograde step and disturbing the trend of opening up of the field. Senior Citizen A new Section 80TTB has been inserted to provide that Senior Citizens are allowed a deduction of upto INR 50,000 in respect of Income earned by such Senior Citizens from Deposits (Saving Account, Fixed Deposits and Time Deposits). Further, in case of Senior Citizens, TDS will be deducted if the Income exceeds INR 50,000. (Amendment made in Section 194A). No deduction under Section 80TTA shall be allowed to such Senior Citizens. Only those deposits are covered which are held with Banking Company, Post Office or Cooperative Societies. Amendments in relation to Trust Applicability of Section 40A(3), 40A(3A) and Section 40(a)(ia) in case of Trusts Income of a religious and charitable trust registered under the Act is taxable under the head Other Sources. The Finance Act, 2018 has made an amendment in order to provide that provisions of Section 40A(3), 40A(3A) and 40(a)(ia) shall also apply to religious or charitable trusts.
P a g e 3 Accordingly, no deduction is allowable for any expenditure: Exceeding INR 10,000 made to a person in a day by cash mode; or Payment of Outstanding Balance exceeding INR 10,000 to a person in a day by cash mode. Stamp Duty Valuation There are various judicial pronouncements which favoured the assessee in case the variation was up to 10% to 15%: a. M/s. LGW Limited vs. I.T.O.(ITANo.267/Kol/2013) b. ACIT vs. Suvarna Rekha(ITANo.743/Hyd/2009) c. Rahul ConstructionCo. vs. ITO(2012) 51SOT192(Pune) Amendments in relation to ICDS The Central Government had notified 10 ICDS under section 145(2), effective from 01 April, 2016, for the purpose of computation of income chargeable under the head business income or IFOS. In order to provide statutory backing to ICDS, it is proposed to amend / introduce certain provisions to provide for computation of income in line with ICDS provisions. The changes are: Allow deduction for marked to market loss or other expected loss, as computed in the manner provided in ICDS under section 36 of the Act. Provide that any gain or loss arising due to changes in foreign exchange rates in respect of all foreign currency transactions shall be treated as income or loss, which shall be computed in the manner provided in ICDS. The amendment is subject to the provisions of section 43A of the Act, which deals with treatment of foreign exchange fluctuations in specified cases. Profits arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method, except for certain service contracts, and the contract revenue shall include retention money, and the contract cost shall not be reduced by incidental interest, dividend and capital gain. Amend section 145A of the Act to provide that: Valuation of inventory shall be made at lower of actual cost or NRV, computed in the manner provided in ICDS;
P a g e 4 Valuation of purchase and sale of goods or services and of inventory shall include the amount of any tax, duty, cess or fee actually paid or incurred by the taxpayer to bring the goods or services to the place of its location and condition as on the date of valuation; Inventory, being unlisted securities, or listed but not quoted regularly on a recognised stock exchange, shall be valued at actual cost initially recognised in the manner provided in ICDS; inventory, being listed securities (other than referred above), shall be valued at lower of actual cost or NRV in the manner provided in ICDS and for this purpose the comparison of actual cost and NRV shall be done category wise. A new section 145B in the Act to provides that Interest received by a taxpayer on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received; The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the tax year in which reasonable certainty of its realisation is achieved; Specified subsidy, grant, etc. shall be deemed to be the income of the tax year in which it is received, if not charged to income tax for any earlier tax year. These amendments are proposed to bring certainty in the wake of a recent judicial pronouncement in relation to the applicability of ICDS. These provisions have to take effect retrospectively from 01 April, 2017 and, accordingly, will apply from AY 2017-18 onwards. Inventory into Capital Asset Conversion of inventory into capital asset becomes taxable in the year of conversion itself. The salient features of amendments are: (i) Section 28, inserting clause (via) so as to provide that the fair market value of inventory as on the date on which it is converted into, or treated as a capital asset determined in the prescribed manner shall be charged to tax as business income. (ii) Section 2(24), inserting clause (xiia) so as to include such fair market value in the definition of income; (iii) Section 49, inserting Sub-Section (9) so as to provide that for the purposes of computation of capital gains arising on transfer of such capital assets, the fair market value on the date of conversion shall be the cost of acquisition; (iv) Clause (42A) of section 2, inserting clause (ba) in Explanation 1 clause(i), so as to provide that the period of holding of such capital asset shall be reckoned from the date of conversion or treatment. New Explanation 1A to Section 43(1) defining actual Cost provides that where a capital asset is from conversion of inventory is used for the purposes of business or profession, the actual cost
P a g e 5 of such asset to the assessee shall be the fair market value which has been taken into account for the purposes of the said clause. New scheme for scrutiny assessment Section 143 of the Act provides for the procedure for assessment. Sub-section (3) of the said section empowers the Assessing Officer to make, by an order in writing, an assessment of total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment. It is proposed to prescribe a new scheme for the purpose of making assessments so as to impart greater transparency and accountability, by eliminating the interface between the Assessing Officer and the assessee, optimal utilization of the resources and introduction of team-based assessment. Therefore, there is amendment o section 143, by inserting a new sub-section (3A), that enables the Central Government to prescribe the aforementioned new scheme for scrutiny assessments. Newly inserted sub-section (3B) in the said section, enabling the Central Government to direct, by notification in the Official Gazette that any of the provisions of this Act relating to assessment shall not apply, or shall apply with such exceptions, modifications and adaptations as may be specified therein. However, no such direction shall be issued after the 31st March 2020. New sub-section (3C) in section 143, provides that every notification issued under the subsection (3A) and sub-section (3B), shall be laid before each House of Parliament. These amendments are operative from 1st April, 2018. Rationalizing provisions of tax neutral transfer Section 47(iv) and 47(v) facilitates tax-free transfer of capital assets or money between wholly owned subsidiary and its holding company. However, these transactions are often subject matter of disagreement between taxpayers and tax dept. Tax officers generally argue to treat these transactions as gifts under Section 56 which was creating an undue hardship for the Cos. Thus it is proposed to amend section 56 so as to exclude the transfer of capital asset or money between a wholly owned subsidiary company and its holding Company out of ambit of residuary income. Accordingly, the transaction without consideration between wholly owned subsidiary and its holding company is not subject to tax. Section 56 Applicable from Assessment Year 2019-20 Certain Deductions not to be allowed if return is not filed on time Provisions of Section 80AC of the Act providedthat no deduction would be admissible under section 80-IA or section 80-IAB or section 80-IB or section 80-IC or section 80-ID or section 80- IE, unless the return of income by the assessee is furnished on or before the due date specified
P a g e 6 under Section 139(1). This burden of filing of return on time is not casted on other assesses who are claiming deductions under other similar provisions. Therefore, to bring uniformity in all income-based deduction, it is now proposed that the scope of section 80AC shall be extended to all similar deductions which are covered in heading "C. Deductions in respect of certain incomes" in Chapter VIA (sections 80 H to 80RRB). The impact of such amendment is that no deduction would be allowed to a taxpayer under these provisions if income-tax return is not filled on or before the due date. It may be appreciated that this amendment does not affect (a) [Section 80AC Applicable from Assessment Year 2018-19 like section 80C, 80D, 80G, etc, (b) CA. Deductions in respect of other incomes like section 80TTA, 80TTB, etc,and D. Other deductions like section 80TTA, etc. Section 80AC Applicable from the current Assessment Year 2018-19 Assessment Procedures Mismatch with Form 26AS Section 143(1)(a)(vi) provides that while processing the return of income, the total income or loss shall be computed after making addition for the difference in income appearing in Form 26AS or Form 16A or Form 16 and income shown in the ITR. Generally, salaried taxpayers are mostly aggrieved by these adjustments. As per the amended law, no adjustments shall be made in respect of Income-tax return furnished on or after Assessment Year 2018-19 just to account for the difference in the income reported in ITR and displayed in tax passbook or tax certificates. Section 143 Applicable from the current Assessment Year 2018-19 E-Assessments The Finance Act, 2018 has inserted provisions for a new scheme for scrutiny assessments to eliminate the interface between the Assessing Officer and the taxpayers. Under the new system, taxpayer will not be required to appear in person before the Assessing Officer as assessment proceedings in all cases selected under scrutiny will now be conducted through e- mail based communications. Paperless assessment/e-mail based assessment was introduced in the financial year 2015-16 on pilot basis in five cities, inter-alia, Ahmedabad, Bangalore, Chennai, Delhi and Mumbai. However, to implement the new system for scrutiny assessment, an amendment was required in Section 143 of the Income-tax Act. Accordingly, new sub-sections (3A) and (3B) are inserted in Section 143 to enable the Central Govt. to make steps towards E-Assessment. The directions in this regard need to be issued on or before March 31, 2020. Section 143(3A), 143(3B), 143(3C) Applicable from the current Assessment Year 2018-19 This amendment shall usher in a new era of faceless assessment. A team of two officers will be responsible for making assessment. This team shall be from a location different than city of the
P a g e 7 assessee. There shall be dynamic jurisdiction of assesses in place of the present static jurisdiction. The Government has set up a technical study group for advice on scheme of E- assessment. Sum Up This write up is to serve as a reminder of certain not so frequently addressed aspects of the amendments flowing from the Finance Act, 2018. There are more significant changes; some of them may be a cause of concern for you. That is the reason, seminar is organized! These provisions will hold the field till the New Direct Tax Law appears on the scène. The talk is of a simple tax law. However, as a tax counsel, one would appreciate that simple tax law is a utopian concept. Law is complicated for arresting illegitimate efforts of tax payers greed to pay less tax, by planning or by avoiding or by evading. And in a country of 125 crore, when there are only 8 crore tax payers, out of which about 5 crore can be salaried ones, where the average population is affected. The small number of rich population can always consult counsels. You do not learn anatomy to cure cough and temperature you go to a doctor! What is really required is a human approach from tax administration. Simplicity in procedures. Robust E-infrastructure. Efforts should rest in that direction. Thanks to the President, and his team and the organizers for the opportunity to interact and to once again, study the topic.