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©2016 Deloitte Haskins & Sells LLP 11

Important provisions relating to Domestic Tax Finance Bill 2017

CA N. C. Hegde

March 4 2017

Chamber of Tax ConsultantsPune

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 PenaltiesMiscellaneous

Corporate tax rates

4

Corporate tax rates (1/4)

Proposed to be reduced to 25% for domestic company whose totalturnover or gross receipt does not exceed INR 50 crore during FY2015-16— A one-time concessional tax rate for AY 2018-19

— Intent is to make the MSME sector competitive and also to encourage firmsto migrate to company format

— Similar to the one-time concessional tax rate of 29% allowed for AY 2017-18 by the Finance Act, 2016 to companies with total turnover notexceeding INR 5 crore during FY 2014-15

Tax rate remains unchanged for other domestic companies (includingmanufacturing companies satisfying prescribed conditions), LLPs andforeign companies

No change in DDT rates – Effective DDT rate of 20.36% continues

5

Corporate tax rates (2/4)

The Finance Act, 2016 also introduced section 115BA allowing anoption to a company set up and registered on or after 1 March 2016to claim a concessional tax rate of 25% (plus applicable surchargeand cess) in respect of its total income for AY 2017-18 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 7November 2016)

— The option to avail the lower tax rate should be exercised in theprescribed manner, on or before the due date of filing the company’s firstreturn of income

— The option once exercised, cannot be withdrawn for the same orsubsequent AY

— Any capital gains will be taxable in accordance with the provisions ofsections 111A, 112

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 expenditurew.e.f. AY 2018-19

Actual cost of asset for depreciation u/s 32:Expenditure incurred on acquisition of any asset shall be ignored for thepurpose of determination of actual cost if payment(s) exceeding INR10,000 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 anyexpenditure for which the payment(s) exceeding INR 10,000 is made ina day otherwise than by an account payee cheque/draft or use of ECSthrough a bank account

8

Restriction on cash donations u/s 80GCurrently, deduction in respect of donation made in cash is allowed onlyfor payments upto INR 10,000. It is proposed to reduce the said limit toINR 2,000

Lower threshold for permissible cash payments -section 40A(3), (3A), (4) w.e.f. AY 2018-19

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 anysubsequent year

expand the specified mode of payment to include use of ECS througha bank account

Income deemed at lower rate for receipts,turnover collected through banking channel

In respect of total turnover, gross receipts collected through bankingchannel before the return filing due date, income to be deemed at alower rate of 6% against 8% as provided under the presumptive incomescheme of section 44AD. Applies to AY 2017-18 & onwards

9

Restriction on cash transactions and penalconsequences – sections 269ST, 271DA

It is proposed that no person shall receive an amount of INR 300,000 ormore otherwise than by an account payee cheque or account payee bankdraft 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 aperson

The said restriction shall not apply to -

− Government, any banking company, post office savings bank or co-operative bank

− The transactions of taking or accepting loans, deposits or sum of moneyreceivable for transfer of immovable property (currently, suchtransactions are restricted by separate provision)

− Such other persons or class of persons or receipts as may be notified bythe Central Government, for reasons to be recorded in writing

A penalty equal to the amount received in cash shall be levied on a personwho receives such sum, unless it is proved that there was sufficient reasonfor such contravention

10

Issues

Do payments through e-wallets qualify as specified mode ofpayment?

Exceptions on the lines of Rule 6DD are required else withdrawals forhousehold expenses, medical emergencies or even those which aresubsequently 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 ofmoney but any transfer of value exceeding INR 3 lakhs

The lower rate of 6% in terms of section 44AD may not apply if thereceipts are collected through banking channels after the return filingdue date

House property income:

Exemption for house property held as stock in trade

Restriction on set off of HP loss

12

It is proposed to introduce a new provision to exempt notionalincome from house property held as stock in trade, where theproperty or any part is not let out during the whole or part of theyear

The exemption to be provided only for the period upto one yearfrom the end of the financial year in which certificate of completionof construction of the property is obtained from the competentauthority

Exemption for house property held as stock in trade – section 23

13

Restriction on set off of loss from House property –section 71(3A)

Loss on account of house propertycan be set off only upto INR200,000 against income under anyother head in the same year.Balance unabsorbed loss to becarried forward and set off onlyagainst “Income from Houseproperty” (upto next 8 years)

Loss on account of house propertycan be set off against any other headof income in the same year withoutany limit. Balance unabsorbed lossto be carried forward and set off onlyagainst “Income from Houseproperty” (upto next 8 years)

Existing Proposed

Particulars Existing Proposed

Rental income 200,000 200,000

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

460,000 200,000

Amount to be carried forward and set off only against “Income from House property” (upto next 8 years)

NIL (260,000)

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 toincrease 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)

16

Deduction to SEZ units – section 10AA (1/3)

Background & proposed amendment:

Pre

sent

pro

vis

ions: 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 The c

ontr

overs

y: 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

Pro

posed p

rovis

ions: 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

17


Illustration:

Existing position

(as upheld by Courts)As per proposed amendment

ParticularsAmount

(INR)

Amount

(INR)

Amount

(INR)

Amount

(INR)

SEZ Unit (eligible for 100%

deduction)

Profit 100 100

Less : Deduction under section

10AA100 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) -

18


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 appliedretrospectively to the ongoing cases as the amendment is clarificatoryin nature

19

Currently, eligible start ups can claim 100% deduction of profits andgain for eligible business for 3 consecutive assessment years out of 5years beginning from the year of incorporation

It is proposed to extend the said period to 3 consecutive assessmentyears 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 partnershipengaged 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 anyof the previous years beginning on or after the 1 April 2016 and endingon the 31 March 2021; andc) it holds a certificate of eligible business from the Inter-MinisterialBoard of Certification as notified in the Official Gazette by the CentralGovernment

Deduction for start-ups – section 80-IAC (1/2)

20

A start-up incorporated in March 2019 would be eligible to claim thededuction for 3 consecutive years out of 7 years until March 2026.However, the turnover threshold of INR 25 crores is applicable till March2021

Clarification is required on the turnover threshold for deduction to beclaimed after March 2021

Deduction for start-ups – section 80-IAC (2/2)

Issue:

21

Relaxation proposed to eligible start-ups to carry forward and set offthe loss against the income of the previous year, irrespective ofchange in shareholding but subject to the condition that all theshareholders, which held shares carrying voting power on the lastday of the year or years in which the loss was incurred, continue tohold those shares on the last day of the previous year in which suchloss is to be set-off.

Change in shareholding due to death of shareholder, gift to a relativeor merger, demerger of foreign parent, is permitted

The loss should be incurred during the period of seven yearsbeginning from the year in which such company is incorporated

Issue:The condition that all the shareholders during the year of loss shouldcontinue during the year in which the set off is sought to be made, maybe practically difficult to achieve as PE investors generally look at a timeframe of 3 to 5 years for exit at a higher price. In terms of the proposedprovisions, even a single such exit could lead to denial of loss set off

Carry forward and set off of loss in case of start-ups – section 79

Proposed provisions:

22

Currently, 100% deduction can be claimed in respect of profits andgains derived from developing and building certain housing projectssubject 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 toapply to the places located within 25 kms from the municipal limits ofChennai, 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. 2017-18 for housing projects that are approved on or after 1 June 2016. Asthe proposed amendment will be effective only from A.Y. 2018-19, therecould be litigation on whether the amended provisions will apply only toprojects approved on or after 1 April 2017, or also to projects approvedbetween 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

Relaxation of conditions for tax holiday to promoteaffordable housing – section 80-IBA

23

Presumptive taxation – section 44AD

It is proposed to reduce the existing rate of deemed profit of 8% to6% in respect of total turnover or gross receipts received throughaccount payee cheque or account payee bank draft or use of ECSthrough a bank account during the previous year or before the duedate of filing the return of income

The existing rate of deemed profit of 8% shall continue to apply inrespect of total turnover or gross receipts received in any other mode

It is proposed to exclude eligible assessee opting for presumptivetaxation scheme from requirement of audit of books, in case the totalsales, total turnover or gross receipts, in business does not exceedINR 2 crore in such previous year– The proposed amendment is effective from 1 April 2016

Refer Slide 12 for issues

24

Rationalisation of advance tax provisions forprofessionals under presumptive tax regime –sections 211, 234C

Provisions relating to single advance tax instalment proposed to bemade applicable to professionals declaring income under thepresumptive taxation regime u/s 44ADA

Consequential amendments proposed under section 234C

25

Rationalisation of MAT provisions for Ind AScompliant companies (1/8)

The Central Government notified the Ind AS and prescribed theCompanies (Indian Accounting Standards) Rules, 2015 which laiddown a roadmap for implementation of Ind AS

For Ind AS compliant company, the financial statements shall includebalance 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 & lossaccount in subsequent periods and items not to be reclassifiedinto profit & loss account in subsequent periods)

The CBDT constituted a Committee (Lohia Committee) in June 2015to suggest the framework for computation of MAT liability u/s 115JBfor Ind AS compliant companies in the year of adoption & thereafter

The Committee submitted two interim reports which were placedbefore stakeholders for recommendations/ suggestions. TheCommittee submitted its final report on 22 December 2016

26


In view of thereof, it is proposed to amend section 115JB w.e.f. 1April 2016

Company whose financial statements are drawn up in compliance toInd AS, the book profit shall be computed in accordance withExplanation 1 to sub-section (2) of section 115JB

Additionally, following adjustments are proposed for items recordedin OCI which will not be reclassified to the statement of profit & lossaccount:

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 instrumentsdesignated at fair value through OCI

All other items (including remeasurements of defined benefitplans) to be included in book profits every year as and when theyarise

27


Adjustments on first time adoption:

Following transition adjustments routed through other equity (whichwill not be reclassified to the profit & loss account) shall be includedin book profits at the time of realisation/ disposal/ retirement:

− Revaluation surplus of assets;

− Gains or losses from investments in equity instruments designatedat fair values through OCI;

− PPE and Intangibles recorded at fair values;

− Investments in subsidiary, joint venture or associates recorded atfair values; and

− Adjustments in relation to cumulative translation differences offoreign operations

For all other adjustments made on the transition, including itemsrouted through OCI (other than items subsequently reclassified intothe profit & loss account), the transition amount shall be included inbook profits of the year of convergence and 4 subsequent years inequal instalments

28


MAT impact on distributions of non-cash assets to shareholderson demerger accounted at fair values:

Additionally, following adjustments to be made in respect of itemsforming part of profit & loss account of the demerged company –

− increase by the amount debited to the profit & loss on distributionof non-cash assets to shareholders in a demerger accounted atfair values

− decrease by the amount credited to the profit & loss ondistribution of non-cash assets to shareholders in a demergeraccounted at fair values

In case of a resulting company, where property and liabilities of theundertaking received are recorded at fair values different from valuesappearing in the books of the demerged company, any change insuch value shall be ignored for MAT purposes

Lohia Committee was silent on the above adjustments in the interim reports

29

Background:High Courts have observed that carbon credit does not arise frombusiness and is generated due to environmental concerns. Incomefrom its transfer is hence a non taxable capital receipt

Proposed provisions:W.e.f. AY 2018-19, income by way of transfer of carbon credit to betaxed @ 10% (plus applicable surcharge and education cess) on grossbasis

Issues:Clarification required as regards: Taxability of such income for years prior to AY 2018-19

Taxation of carbon credits – section 115BBG

30

Proposed provisions:Effective 1 April 2018, the time period for carry forward of MAT andAMT credit stands extended from existing 10 assessment years to 15assessment years

Issue:Whether the extended time limit would apply to MAT credit for the AYs(viz. AYs 2006-07 and 2007-08) in respect of which the ten year carryforward period expired before AY 2018-19, but the fifteen year timeperiod is yet to expire?

Extended time limit for carry forward and set off ofMAT/ AMT credit – sections 115JAA(3A), 115JD(4)

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 – section2(42A)

It is proposed to reduce the period of holding in case of immovableproperty, being land or building or both, from 36 months to 24 monthsto qualify as long term capital assets

Issue:Whether ‘land or building’ would include: Leasehold rights Tenancy rights Flats in a co-operative housing society

33

Base year to be shifted from 1981 to 2001 forcomputation of capital gains – section 55

Currently, the IT Act provides that in case an asset is acquired before1 April 1981, the tax payer has an option to take either the FMV ofthe asset as on 1 April 1981 or the actual cost of the asset, as thecost of acquisition for computing the capital gains on transfer

It is proposed to shift the base year for indexation purposes to 1 April2001

Further, it is proposed that cost of acquisition of an asset acquiredbefore 1 April 2001 shall be allowed to be taken as FMV as on 1 April2001

34

Clarification on the amendment made to section 112 by Finance Act, 2016:

Transfer of shares of private company

IT Act provides for concessional tax rate of 10% for long term capitalgains arising to a non-resident shareholder from transfer of unlistedsecurities

The concessional rate was applicable from 1 April 2012

There was an uncertainty as to whether the concessional rate of tax isapplicable to the transfer of share of a closely held company

Finance Act, 2016 amended the provision to provide that theconcessional rate is also applicable to transfer of shares of a closely heldcompany

The aforesaid amendment was applicable from 1 April 2016

Accordingly, the uncertainty remained about the applicability of theamendment in the intervening period

It is proposed that:

The concessional rate of tax would also be applicable for closely heldcompany during the intervening period

The proposed amendment will be effective from 1 April 2012

35

Additional condition for availing LTCG exemptionu/s 10(38) (1/3)

Present provisions vs. proposed provisions (w.e.f. AY 2018-19):

Long term capital gain (LTCG)arising on transfer of listed equityshares is exempt where

Transfer of shares is on or after 1 October 2004; and

The transaction is subject to securities transaction tax (STT)

Present provisions

Exemption u/s 10(38) would notbe available if:

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 bythe Central Government, cancontinue to claim exemption

Proposed provisions

Anti-abusive measure to prevent misuse of exemption in relation to

unaccounted income from sham transactions

36


Issues & observations:

May lead to denial of benefit even in cases where the acquisitionwithout payment of STT, was not with the intent of abusing theexemption. Hence a better course may be to specify a negative listof 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 bulkdeal / block deal parameters)

37


Issues & observations (contd..):

Shares acquired pursuant to a family arrangement/ settlement where STTwas 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

38

Joint Development Agreements – sections 45(5A),49, 194-IC (1/7)

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

JDA – Salient features:

39


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

40


The controversy:

What would be the ‘taxable event’ for the land owner i.e. whether itwould 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 toconsiderable litigation

41


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 inpart performance, relevant to decide date of transfer

Ajay Kumar Shah Jagati [2008](215 CTR 396)(SC), Geetadevi Pasari [2009](17DTR 280)(Bom HC):Possession is an essential element in deciding whether a ‘transfer’ in terms ofsection 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 notwhen 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 wasno ‘transfer’ within the meaning of section 2(47)(v)

42


Proposed provisions - W.e.f. AY 2018-19, except section 194-ICwhich will apply from 1 April 2017:

Sections 4

5(5

A),

49,

194-I

C

Applies to an individual or HUF transferring land and/or building under aregistered JDA

Capital gain would be taxable in the year in which competent authorityissues certificate of completion (COC) of the whole or part project

Full value of consideration = Stamp duty value of share in the project onthe date of COC issuance + Any cash consideration

Proposed provisions will not apply if share in the project is transferred onor before the date of COC. In such case, section 45(1) r.w.s. 48 will apply

TDS @ 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

43


Issues & observations:

The proposed amendment applies only to individuals & HUF. As thehardship 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 DevelopmentRights (TDR) transferred under a JDA, despite Courts ruling that saleof TDR is not liable to capital gains tax?

The entire capital gains would be taxed in the year in which theproject COC is obtained, even when the COC is for part project only

Transfer of even a part share in the project before the date ofissuance of COC will make the entire transaction taxable in the yearof transfer itself. This may cause genuine difficulty, particularly incase of long term or delayed projects

44


Issues & observations (contd..):

Converting project share into stock-in-trade before issuance of COCamounts 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 providesfor reference to a Valuation Officer if the assessee claims that thestamp duty value exceeds the FMV of the property as on the date oftransfer. However, the same is not provided for in the proposedsection 45(5A)

45

Tax neutral conversion of preference shares intoequity shares - sections 47(xb), 2(42A), 49(2AE)

Currently, conversion of bond or debenture of a company into sharesof that company is not regarded as transfer

However, no similar tax exemption was available in case ofconversion of preference shares of a company into its equity shares

It is proposed that the conversion of preference share of a companyinto equity share of that company will not be regarded as transfer

In determining the period of holding of such equity shares, the periodof holding of the preference shares shall be included

The cost of acquisition of the converted equity shares shall bedeemed to be the cost of acquisition of preference share

46

FMV based taxation of unquoted shares – section50CA (1/4)

Currently, an anti-abuse measure is contained in section 50C whichprovides that if land or building or both is transferred for aconsideration which is lower than the value adopted or assessed by theState Government authority for payment of stamp duty, then suchassessed value shall be deemed to be the full value of consideration forthe purposes of section 48

The proposed amendment is another anti-abuse measure to provide forlevy of Fair Market Value (FMV) based capital gains tax on transfer ofunquoted shares in cases where the sale consideration is lower thansuch FMV

Background:

47


Proposed provisions – w.e.f. AY 2018-19:

If sale price of unquoted shares <prescribed FMV, FMV shall bedeemed as full value ofconsideration

‘Quoted share’ means sharequoted on any recognised stockexchange with regularity fromtime to time, where the quotationis based on current transactionmade in ordinary business course

Manner of determination of FMV to be prescribed

48


Issues:

Constitutionally valid?

Whether ‘understatement’ by the assessee is a pre-requisite?

What would constitute trading regularity for the shares to be coveredu/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

49


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 beavoided 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 likesections 45(2), 45(3), 45(4), 46(2), etc.?

What would be the position if the manner of determining FMV u/s50CA is different from the methodology prescribed u/s 56?

50

Currently long term capital gain to the extent of INR 50 lakhs isexempt on investing such gain in the bonds issued by NationalHighways Authority of India or by the Rural Electrification CorporationLimited.

Such exemption is now proposed to be extended to any bondredeemable after 3 years (notified by Central Government in thisbehalf)

Expanded scope of long term bonds u/s 54EC

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:

Individual/HUFs taxable if any

sum of money or property received

without or for inadequate

consideration in excess of INR

50000

Section 56(2)(vii) 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

Section 56(2)(viia)

The following anti-abuse provisions are currently in force to prevent thepractice of receiving money or property without consideration or forinadequate consideration

53


Proposed provisions – W.e.f. AY 2018-19: The applicability of the present provisions has been limited till 31 March2017 and it is proposed that any receipt of money and/or property(exceeding INR50,000) by all assessees would be taxable as incomefrom 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 re-organisationsexempt 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)

54


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 toargue that the charge fails as gift is a capital receipt

Carve-outs ought are required in respect of transactions that areeither exempt under the Act, or have been judicially upheld as non-taxable, 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

55


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 closelyheld company. However, proposed section 56(2)(x) covers any shareor security

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 taxed @

10% on dividend income exceeding INR 10 lakhs i.e. theprovisions presently apply only to resident individuals, HUF andfirms including LLPs

Further, section 115BBDA(2) prohibits deduction of expensesrelating 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 taxresulting from under-estimate or failure to estimate dividendincome taxable u/s 115BBDA, subject to specified conditions

57


Issues:

The expenses relating to dividend income up to INR 10 lakhs that isexempt u/s 10(34), are disallowable u/s 14A. Further, the expensesincurred for earning the taxable dividend income beyond INR 10 lacsare disallowable u/s 115BBDA(2)

There could hence be an overlap and clarity is required on the mannerof calculating disallowance u/s 14A read with Rule 8D and u/s115BBDA(2)

Eg: Mr. X has paid a fee of Rs. 75,000 for investment advisoryservices. The annual average of monthly average of the opening andclosing 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 from3 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)

58


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 “directlyrelating to income which does not form part of total income”,especially when dividend was received from only 3 out of the 5companies in which Mr. X had invested?

How is the disallowance to be determined considering that dividendincome of Rs.15 lakhs would form part of Mr. X’s total income in termsof section 115BBDA(1)?

Would disallowance u/s 115BBDA(2) be attracted even in a casewhere Mr. X is a dealer in shares and the investments constitutestock-in-trade?

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Disallowance of expense on failure to deduct TDS -section 58

Existing provision of disallowance of 30% of sum payable to aresident for not complying with the TDS provisions while computingincome chargeable under the head ‘profit and gains of business orprofession’ is proposed to be extended to computation of incomeunder the head ‘income from other sources’

Deduction shall be allowed in the year in which the default isregularized

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 outof accumulated income) by a trust or institution to any other trust orinstitution is considered as application of income for the purposes ofits objects

It is proposed that corpus donation made by a trust or institution toany other trust or institution shall not be treated as application ofincome

Issue: This may lead to hardship for genuine cases where the funds are

actually utilized by the donee trust. Alternative measures likeprescribing a reasonable time frame for utilization by the donee, maybe better

62

Procedural clarification in respect of modification ofobject and filing of tax return – section 12A

It is proposed to introduce a new provision whereby an exempt trustshall be required to obtain a fresh registration in case ofmodifications 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 115TDwhich provides for an exit tax when a trust converts into a non-charitable institution. The said section provides that a modification ofobjects which does not confirm with the conditions of registration,shall be deemed as conversion into a non-charitable institution iffresh registration is not obtained

It is proposed to introduce a clarification to provide an additionalcondition of filing the return of income within the prescribed time linefor availing the exemptions under sections 11 and 12

Domestic transfer pricing

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Specified domestic transaction – section 92BA

Regulations for specified domestic transaction rationalized

Definition of specified domestic transaction has been relaxed toexclude expenditure in respect of which payment has been made orto be made to certain specified persons

This change will be effective from 1 April 2017 and will apply for AY2017-18 and onwards

However, transfer pricing regulations in respect of transactionsbetween related parties enjoying specified profit linked deductions,will continue to apply

This will reduce compliance burden

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 – section194-IB (w.e.f 1 June 2017) (1/2)

Who will deduct?

Individuals or HUF (other than those who are liable to tax audit under section 44AB of the Act) paying rent to a resident individual

Limit above which TDS is applicable

Amount exceeding INR 50,000 per month.

Rate of tax to be deducted

5% of total rent paid

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)

12

34

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TDS on rent paid by individual and HUF – section194-IB (w.e.f 1 June 2017) (2/2)

It is also proposed to provide that where the tax is required to bededucted as per the provisions of section 206AA, such deductionshall not exceed the amount of rent payable for the last month ofthe 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 theyear and the amount of rent per month before such increment wasless than Rs 50,000. In the said scenario, would tax have to bededucted on the rent paid during the entire previous year althoughthe rent per month for some of the months is less than Rs.50,000or whether the tax needs to be deducted on the aggregate amountof 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 previousyear, simple compliance measures (in line with section 194-IA)would be preferred

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Changes in withholding tax rates

Section Particulars Existing Rate Proposed RateEffective from

194J

Fees for professional or technical services

10%

2% forrecipients engaged only in the business of operation of call centre

1 June 2017

194LA

Payment of compensation on acquisitionof certain immovable property

10%

Nil – wherethe payment is exempt from levy of income-tax under the RFCTLARR Act

1 April 2017

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 newprovisions 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 furnishPAN 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

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Interest on refund arising to the tax deductor –section 244A(1B)

Currently, the assessee is entitled to receive interest on refundarising out of excess payment of advance tax, TDS, TCS or other taxpayments

It is proposed to grant interest on refund arising to the tax deductor-

− In case of claim for refund made in the prescribed form ~ fromthe date such claim to the date on which refund is granted

− In case of an order passed in appeal ~ from the date on which thetax is paid to the date on which refund is granted

The proposed amendment is effective from 1 April 2016

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 ofthe relevant assessment year instead of the present provisions whichallow a time frame of one year from the end of the relevantassessment year

Revised limitation applies to returns for assessment year 2018-19and subsequent years― Return of income for assessment year 2018-19 can be revised upto

31 March 2019

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 afterthe prescribed due dates:

− INR 5,000 ~ if return is filed on or before 31 December of theassessment 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 ofincome before the end of the relevant AY will not be applicable

It is proposed to amend provisions relating to self-assessment tax toinclude that in case of delayed filing of return of income, theassessee shall be required to pay a fee for delay along with the taxand interest payable

Further, while processing the return, the fee for delay shall also beconsidered in computation of amount payable or refund due

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' ofcircumstances referred to in sections 132(1), 132(1A) and section132A of the Act based on the information in his possession, he mayauthorise:

− Search and seizure

− Requisition from some other officer or authority to deliver books ofaccount, 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 authorityshall not be disclosed to any person, authority or Appellate Tribunal

The amendments will be effective retrospectively from the date ofenactment of the provisions i.e. from 1 April 1962 in case of section132(1) of the Act and from 1 October 1975 in case of section132(1A) and 132A of the Act

76


It is proposed that authorised officer may provisionally attach anyproperty 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 theauthorisations for search was executed, with the prior approval

Such provisional attachment shall not have effect after the expiry of6 months from the date of order of such attachment

It is further proposed that the authorised officer may make areference 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 ofreceipt of such reference

77


It is proposed to increase the period for which search may beconducted or requisition may be made, from existing 6 yearspreceding the assessment year relevant to the previous year to 10years, subject to the following:

− AO is in possession of books or documents or evidence whichreveal that the income escaping assessment may be INR 50lakhs or more;

− Such income escaping assessment is in the form of an asset;

− The income escaping assessment or part thereof relates to theadditional 4 years;

− Such search or requisition is initiated on or after 1 April 2017

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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 ofcash or stock or other valuable article or thing relating to thebusiness or profession are kept, for the purposes of conducting asurvey

It is proposed to widen the scope to include any place at which anactivity for charitable purpose is carried on

The amendment will be effective from 1 April 2016

79

Time limit for completion of assessmentproceedings (1/2)

It has been proposed to amend the time limit for completion ofassessment proceedings as under:

The aforesaid changes in the time limit of completion ofassessment are also proposed to be applicable for passing anorder in case of search or requisition cases conducted in financialyear 2018-19 and 2019-20

ExistingProposed in respect of assessment year 2018-19

Proposed in respect of assessment year 2019-20

21 months from theend of the assessmentyear in which incomewas assessable

18 months from theend of the assessmentyear in which incomewas assessable (i.e. by30 September 2020)

12 months from theend of the assessmentyear in which incomewas assessable (i.e. by31 March 2021)

80

Time limit for completion of assessmentproceedings (2/2)

Effective from 1 April 2016

Particulars Existing ProposedAdditional conditions

Time limit forcompletion of re-assessmentproceedings

9 months from endof financial year inwhich notice undersection 148 of theAct is served

12 months fromend of financial yearin which noticeunder section 148of the Act is served

Applicable to noticeunder section 148of the Act served onor after 1 April2019

Time limit formaking an order offresh assessmentpursuant to orderspassed or received

9 months from endof financial year inwhich order isreceived

12 months fromend of financial yearin which order isreceived

Orders passed orreceived in financialyear 2019-20 andonwards

Time limit for givingeffect to orderspassed

9 months from endof financial year inwhich order ispassed

12 months fromend of financial yearin which order ispassed

Applicable whereverification of anyissue is required orwhere anopportunity to beheard is to beprovided to theassessee

Penalties:

Penalty on professionals for incorrect reporting in certificates, reports – section 271J

CBDT’s power to direct in relation to penalty u/s 271C/ 271CA

82

Penalty on professionals for furnishing incorrectinformation in statutory report or certificate –section 271J

Various certificates and reports are required to be issued under theITA by accountants, merchant bankers and/or valuers, eg: tax auditand transfer pricing reports, valuation under Rule 11UB, etc.

W.e.f. 1 April 2017, it is proposed to levy penalty of INR 10,000 forincorrect information in a report or certificate furnished by anaccountant, merchant banker or registered valuer for each suchreport or certificate, unless it is proved that there was reasonablecause for such failure

The intent is to ensure that the person furnishing report or certificateundertakes due diligence before making such certification

83

CBDT empowered to issue directions/ instructionsin relation to penalty u/s. 271C/ CA – section 119

Section 119(2)(a) empowers the CBDT to issue directions orinstructions (not being prejudicial to taxpayers) to subordinateauthorities in the work relating to assessment/ collection of revenue/initiation of penalty proceedings

Sections 271C and 271CA deal with levy of penalty for failure todeduct / collect tax at source respectively

It is proposed to insert reference to sections 271C and 271CA insection 119(2)(a) to empower the CBDT to issue directions orinstructions in relation to imposition of penalties under said sections

As per the Explanatory Memorandum, the intent is to reduce genuinehardship faced by taxpayers, being persons responsible for deductionor collection of tax at source, in case of levy of penalty u/s. 271C/ CA

Miscellaneous ICDS

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Income Computation and Disclosure Standards In terms of the powers granted u/s 145(2) of the ITA, ten ICDS were notified

vide notification no. 32/2015 dated 31 March 2015, to operationalize a new

framework for computation of taxable income under the heads ‘Profits & gains

of business/profession’ and ‘Income from other sources’. The same were to

apply from 1 April 2015 i.e. from AY 2016-17

The representations received from and clarifications sought by various

stakeholders were examined by an Expert Committee and on 6 July 2016, the

Finance Ministry announced revision of ICDS as well as its deferment by one

year i.e. the revised ICDS would apply from 1 April 2016 i.e. from AY 2017-18

Accordingly, vide notification no. 87/2016 dated 29 September 2016, the

ICDS earlier announced in March 2015 were repealed and were replaced with

revised ICDS. Further, vide notification no. 88/2016 dated 29 September

2016, amendments were announced to Form 3CD to capture disclosures and

compliance mandated under the revised ICDS

The newly notified ICDS have to be followed by all assessees (other than an

individual or a Hindu undivided family who is not required to get accounts of

the previous year audited u/s 44AB) following the mercantile system of

accounting, for the purposes of computation of income chargeable to income-

tax under the head “Profits and gains of business or profession” or “Income

from other sources”, from A.Y.2017-18

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Abbreviations:

AAR Authority for Advance RulingsAMT Alternate Minimum TaxAO Assessing OfficerAY Assessment YearCBDT Central Board of Direct TaxesDDT Dividend Distribution TaxECS Electronic Clearing SystemFMV Fair Market ValueFY Financial YearHUF Hindu Undivided FamilyICDS Income Computation and Disclosure StandardINR Indian RupeesITA Income-tax Act, 1961LLP Limited Liability PartnershipLTCG Long term capital gainMAT Minimum Alternate TaxMSME Micro, Small, Medium EnterprisesOCI Other Comprehensive IncomePAN Permanent Account NumberPE Private Equity/ Permanent EstablishmentP&L Profit & Loss AccountSEZ Special Economic ZoneSTT Securities Transaction TaxTCS Tax collected at sourceTDS Tax deducted at source

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