Revaluation of Capital Asset Made Liable to Capital Gains Tax

In the case of The Commissioner of Income Tax v. M/s Manuskh Dyeing and and Printing Mills (Partnership Firm) [Civil Appeal No. 8258 & 8259 of 2022], the Supreme Court panel comprising of Justice M.R. Shah and M.M. Sundresh ruled that Section 45(4) of the Income Tax Act applied where there was an increase in partners’ capital account on account of revaluation of asset (land & building).

The bench stated that the partners had access to the money in order to withdraw it. The assets so revalued and the credit made to the capital accounts of the individual partners were therefore a “transfer” and came under the category of “OTHERWISE.” As a result, Section 45(4)’s provision was applicable.

Background

The assessee a partnership firm constituted with four related individuals were engaged in the business of Dyeing and Printing, Processing, Manufacturing and Trading under the following profit-sharing structure.
Share of Profit
For ease of reference, herewith Partners are referred as A, B, C, D:

Phase 1

Execution of Family Settlement Deed dated 02/05/1991; the share of one of the existing partners (Mr. D) was reduced and distributed among new incoming partners (Let’s say E, F & G):
Partners and Share of Profit (Post Settlement)
 

Phase 2

Reconstitution of Partnership Firm; Partner B, C & D retired from the Firm:
Partnership structure (Post Retirement)
   

Phase 3

The Firm was again reconstituted on 01/11/1992; 4 new partners were added.
Partnership structure and contribution by new partners (Post Reconstruction)
In the reconstituted partnership deed two partners, namely, A and E decided to withdraw part of their capital.

Phase 4

The assessee revalued the asset (Land & Building) for an amount of Rs.17.34 crores against which the capital account of H, I, J & K was revised:  
Particulars H I J K
Initial Capital Contribution 4.5 Lac 2.5 Lac 2.25 Lac 2.25 Lac
Revised Capital Account 3.12 Cr 1.73 Cr 1.56 Cr 1.56 Cr

Facts of the Case

  1. The Return of Income was filed for Assessment Year “AY”1993-1994 declaring total income of Rs. 3,18,760/-. The same was accepted under Section 143(1) of the Income Tax Act, 1961(hereinafter referred to as the Act).
  2. However, thereafter, the assessment was reopened under Section 147 of the Act by issuance of the notice under Section 148 of the Act. The assessment was reassessed under Section 143(3) read with Section 147 of the Act determining the total income of Rs.2,55,19,490/
  3. Addition of Rs.17.34 Cr. was made towards short term capital gain under Section 45(4) of the Act. Similar addition was made for A.Y. 1994-1995.
  4. As per the Assessing Officer., the assessee revalued the land and building and enhanced the valuation from Rs.21,13,225/- to Rs. 17,56,00,000/- for AY 1993-1994 thereby increasing the value of the assets by Rs.17,34,86,772/- and therefore the revaluing of the assets, and subsequently crediting it to the respective partners’ capital accounts constitutes transfer, which was liable to capital gains tax under Section 45(4) of the Act.
  5. As land and building was involved, the assessee had claimed the depreciation on building, and the Assessing Officer assessed the amount of short-term capital gain under Section 50 of the Act.
  6. The CIT(A) confirmed the addition made by the Assessing Officer. However, ITAT allowed the appeal and has set aside the addition made by the A.O. towards Short Term Capital Gains by observing that revaluation of the assets and crediting to partners’ account did not involve any transfer.
  7. The High court dismissed the appeal preferred by the Revenue. Thus, the revenue approached the supreme court.

Question Before the Apex Court

Whether increase in partners’ capital account on account of revaluation of asset (land & building) would fall under section 45(4) of the Act as introduced by the Finance Act, 1987?

Ruling

  1. At the outset, the Apex Court stated that, the object and purpose of introduction of Section 45(4) of the Act was to pluck the loophole by insertion of Section 45(4) and omission of Section 2(47)(ii) of the Act. Earlier, omission of Clause (ii) of Section 2(47) and Section 47(ii) exempted the transform by way of distribution of capital assets from the ambit of the definition of “transfer”. The same helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same at the time of dissolution. The said loophole came to be plucked by insertion of Section 45(4) and omission of Section 2(47)(ii). At this stage, it is required to be noted that the word used “OR OTHERWISE” in Section 45(4) is very important.
  2. In the present case, the assessee relied upon the decision of Bombay High Court in case of Commissioner of Income Tax, West Bengal Vs. Hind Construction Ltd., (1972) 4 SCC 460 wherein it was stated that “unless there is a dissolution of partnership firm and thereby the transfer of the amount on revaluation to the capital accounts of the respective partners, Section 45(4) of the Income Tax shall not be applicable.” However, the Apex Court stated that, in view of the amended Section 45(4) of the Income Tax Act inserted vide Finance Act, 1987, by which, “OR OTHERWISE” is specifically added, the aforesaid case has no substance.
  3. The CIT(A) relied on the decision of Bombay High Court in case of Commissioner of Income Tax Vs. A.N. Naik Associates and Ors., (2004) 265 ITR 346 (Bom.) wherein the Court had “an occasion to elaborately consider the word “OTHERWISE” used in Section 45(4). After detailed analysis of Section 45(4), it is observed and held that the word “OTHERWISE” used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partners of a partnership, transferring the assets in favour of a retiring partner.”
  4. Under the circumstances, for the purpose of interpretation of newly inserted Section 45(4) to the Act, the decision of this Court in the case of Hind Construction Ltd. (supra) shall not be applicable and/or the same shall not be of any assistance to the assessee. As such, we are in complete agreement with the view taken by the Bombay High Court in the case of A.N. Naik Associates and Ors., (supra). We affirm the view taken by the Bombay High Court in the above decision.
  5. In the present case, the Apex Court held that the assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores on 01.01.1993 (relevant to A.Y. 1993-1994) and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets’ revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets valued at Rs. 17.34 crores to the partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital ranging between Rs. 2.5 to 4.5 lakhs and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts.
Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” and which fall in the category of “OTHERWISE” and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable.  

Held

In view of the above and for the reasons stated above, the impugned judgment and order passed by the High Court and that of the ITAT were held unsustainable and were quashed and set aside with the original order being restored. Present appeals were accordingly allowed with no cost.

FM Comments

The Supreme Court decision clarifies the interpretation of the provisions of section 45(4) of the Act and holds that the revaluation of capital asset and consequent credit into the capital accounts of the respective partners would be chargeable to tax as capital gains. The Judgement will impact the Real Estate Industry and others who had taken the benefit of these provisions as a tax planning strategy.

The bench stated that the partners had access to the money in order to withdraw it. The assets so revalued and the credit made to the capital accounts of the individual partners were therefore a “transfer” and came under the category of “OTHERWISE.” As a result, Section 45(4)’s provision was applicable.

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Equalisation Levy Not Applicable on Google Ads where Advertiser and Target Located Overseas

The Hon’ble Jaipur ITAT has recently confirmed an order passed by the National Faceless Appeal Centre, Delhi (‘NFAC’) that no equalization levy was payable by a service provider of online advertisements since it merely acted as a conduit for getting the advertisements run on Google where both the advertisers and the target audience/target location of these online ads, were outside India and had no connection with India.

The assessee – an individual (proprietor of Oan Media and Web Solutions) was a service provider of online advertisement, digital marketing and web designing for consultancy charges. During the assessment year 2018-19, the assessee had made payment towards advertisement (AdWords) charges to M/s. Google Asia Pacific Pte. Ltd., Singapore [‘Google Singapore’), a non-resident, having no Permanent Establishment (PE) in India.

It was the contention of the Assessing Officer (‘AO’) that Section 165 of the Finance Act, 2016, relating to equalisation levy @ 6% was attracted in the assessee’s case, regarding the above transaction.

Section 165 of the Finance Act, 2016 provides that:

“165. (1) On and from the date of commencement of this Chapter, there shall be charged an equalisation levy at the rate of six per cent of the amount of consideration for any specified service received or receivable by a person, being a non-resident from—

  1. a person resident in India and carrying on business or profession; or
  2. a non-resident having a permanent establishment in India.

                  (2) The equalisation levy under sub-section (1) shall not be charged, where—

  1. the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment;
  2. the aggregate amount of consideration for specified service received or receivable in a previous year by the non-resident from a person resident in India and carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed one lakh rupees; or
  3. where the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession”

As such, the AO, while passing the assessment order, made a disallowance u/s 40(a)(ib), on the ground that payment was made by the assessee, on behalf of his clients, to a Non-Resident, for advertisement purposes, in the digital mode and no tax was deducted by the assessee, towards equalisation levy on the said payment. This action attracted the provisions of sec.165(1) of the Finance Act, 2016 and the conditions mentioned therein. The AO also contended that the assessee’s case does not fall within the exceptions provided u/s 165(2) of the Finance Act, 2016.

The AO further pointed out that the equalisation levy is not part of income tax and therefore, any payment on which equalisation levy is applicable will not fall within the provisions of the Double Tax Avoidance Agreement (DTAA) and the taxpayer will have to pay equalisation levy, regardless of the provisions of the DTAA and the country the recipient belonged.

On appeal, the NFAC passed an order in favour of the assessee and held that the entire target audience/target location of these online ads, was outside India and had no connection with India. The assessee was only acting as a conduit for channelising payments received from his clients located outside India to Google Singapore, on behalf of these clients. These clients, for whose benefit the online ads were run on Google and who were the ultimate beneficiaries of the online ads, were neither residents of India nor could they be called as Non-residents having a PE in India. The entire business related to these online ads was carried out outside India. The assessee was merely working on behalf of these ultimate beneficiaries, who were his clients.

The Hon’ble Jaipur ITAT, while passing its order in the Revenue’s appeal, agreed with the observations of the NFAC, that the role of the assessee was that of an agent of Google Singapore and that the assessee was merely a conduit for getting the advertisement run on Google. It was not the assessee, but the person running the advertisement, who decided where the advertisement was to be run, on which geographical location, who would be the targeted audience and for how much duration such advertisement was to be run. All these people were not in the jurisdiction of India and this fact was never disputed by the Revenue. The Hon’ble ITAT, therefore, did not find any reason to interfere with the order of the NFAC, Delhi and passed a ruling in favour of the assessee.

 

FMA Comments

The above ruling provides much-needed clarity on the non-applicability of the relatively new provisions of the Equalisation Levy, especially where the payment that is being made towards digital advertising to advertisers located outside India, clearly pertains to situations where the ultimate beneficiary of the ad as well the advertisers, are both located overseas. The ruling has correctly reiterated the classic ‘’substance over form’’ dictum and should help taxpayers in planning their business activities, more definitively, going forward.

Image Credits: Photo by Rubaitul Azad on Unsplash

The above ruling provides much-needed clarity on the non-applicability of the relatively new provisions of the Equalisation Levy, especially where the payment that is being made towards digital advertising to advertisers located outside India, clearly pertains to situations where the ultimate beneficiary of the ad as well the advertisers, are both located overseas.

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Presumptive Tax Scheme in India – A Deep Dive

The provisions relating to Presumptive Tax Scheme (PTS) under the Income Tax Act, 1961 (ITA) are inter alia, covered under Sections 44AD, 44ADA, 44AE, 44B, 44BB, 44BBA and 44BBB. In this article, we have limited our discussion to Sections 44AD & 44ADA.

While Section 44AD covers within its ambit small taxpayers engaged in eligible business, Section 44ADA covers eligible professionals. Taxpayers opting for PTS are allowed to declare income as a prescribed percentage of turnover / gross receipts of the business/profession (as the case may be) and are exempted from maintaining books of account and getting them audited annually. As the taxable income is deemed/presumed to be a percentage of turnover / gross receipts, this scheme is popularly known as ‘presumptive taxation scheme’.

Decoding Section 44AD

 

 

Legislative History

The PTS was first introduced by the Finance Act of 1994 to estimate taxable income from the civil construction business or the supply of labour for civil construction work. The income from such businesses is estimated to be 8% of gross receipts, provided that such gross receipts do not exceed INR 40 lakhs. The taxpayer, if he chose, was allowed to voluntarily declare a higher income in his tax return.

The Finance Act, 1999, amended the PTS with retrospective effect from financial year (FY) 1997-98 and mandated the requirement of furnishing an audit report in cases where the assessee offered an income lower than 8% of gross receipts.

A significant change in the entire structure of PTS was made vide The Finance (No. 2) Act, 2009, w.e.f FY 2010-11. The scope of PTS was expanded to all ‘eligible assessees’ engaged in ‘eligible business’.

 

Coverage

 

Category of taxpayers covered:

The following categories of taxpayers having total turnover / gross receipts from business not exceeding INR 2 crores in a financial year can opt for PTS under section 44AD of the ITA:

  • Resident Individual;
  • Resident Hindu Undivided Family (HUF);
  • Resident Partnership Firm (not being a Limited Liability Partnership (LLP))
 
Category of businesses covered:

PTS under Section 44AD covers all businesses except the below, where the taxpayer is:

  • Earning income in the nature of commission or brokerage.
  • Engaged in the agency business.
  • Engaged in the business of plying, hiring or leasing goods carriages.

(This business is covered under PTS under Section 44AE of ITA)

  • Carrying on a specified profession.

(These professionals are covered under PTS under Section 44ADA of ITA, which is discussed in the latter part of this article).

  • Intending to claim deductions under sections 10A, 10AA, 10B, 10BA, 80HH, to 80RRB of the ITA.

 

 

Percentage of deemed income

Under Section 44AD, the taxable income of eligible assessees engaged in eligible business (as discussed above) is presumed to be 8% of the turnover/gross receipts.

To promote non-cash transactions, a lower rate of 6% has been provided in respect of the amount of turnover/gross receipts, that is received by the assessee on or before the due date of filing the Income Tax Return, by way of:

  • Account payee cheque or account payee bank draft;
  • Electronic Clearing System, Net banking, RTGS, NEFT;
  • Credit Card or Debit Card;
  • IMPS, UPI or BHIM Aadhar Pay.

Though the PTS provides for taxable income to be 8%/6% of turnover or gross receipts, taxpayers can voluntarily declare a higher income on their tax return.

 

 

Meaning of Turnover or Gross Receipts

The terms “turnover” and “gross receipts” are not defined in the ITA.

Reference can be made to the Guidance Note on Tax Audit under Section 44AB of the ITA (Guidance Note). Para 5.10 of the Guidance Note is reproduced below:

“5.10 Considering that the words “Sales”, “Turnover” and “Gross receipts” are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion.”

 

 

Other Important Points to Remember

 
 
  • Advance Tax: The due date for payment of advance tax shall be the 15th March of such FY;
  • Additional deductions: All the deductions u/s 30 to 38 for all taxpayers and in the case of partnership firms, interest and salary/remuneration to partners, would be deemed to have been allowed to the taxpayer.
  • Additional disallowances: Any disallowance relating to cash payments above INR 10,000 for expenses, non-deduction of tax at source, etc. will not be required to be added back, as Section 44AD overrides Sections 28 to 43C of the ITA.
  • Mandatory Tax Audit: In the case where the taxpayer has declared income as per PTS under Section 44AD in any FY and does not declare income in accordance with Section 44AD in any of the next five FYs, the taxpayer shall not be eligible to declare income under PTS for next five FYs, subsequent to the year in which income is not declared as per PTS under Section 44AD. Further, the taxpayer would also be required to maintain books of account and get them audited, irrespective of the turnover in the next 5 years, if his total income exceeds the maximum amount that is not chargeable to tax, i.e. the applicable basic exemption limit.

Illustration: Mr. A claims to be taxed under PTS under Section 44AD for Assessment Year (AY) 2019-20 and offers income in accordance with PTS. However, for AY 2020-21, he declares his income at a rate lower than the rate prescribed under PTS. In this case, Mr. A will not be eligible to claim the benefit of PTS for the next 5 AYs and will mandatorily be required to keep and maintain books of account and get them audited annually for those years as well i.e. AY 2021-22 to 2025-26 if his total income exceeds the maximum amount not chargeable to tax (basic exemption limit).

This is explained with the help of the following table in the case of Mr. X:

 

AYTurnover (in Cr)Profit (%)Income more than basic exemption limitSections applicableNote no.
44AA44AB44AD
2018-1937%YesYesYesNo1
2019-201.29%YesNoNoYes2
2020-210.855%YesYesYesNo3
2021-220.7510%YesYesYesNo4
2022-231.22%NoYesYesNo5
2023-241.59%YesYesYesNo

 

 

6

2024-250.926%YesYesYesNo
2025-260.959%YesYesYesNo
2026-272.56%YesYesYesNo

 

Note 1: Turnover exceeds Rs.1 Crore and hence, liable to maintain books of account and get them audited.

Note 2: Since Mr X declared income in accordance with the provisions of PTS under Section 44AD, he is not required to maintain books of account and get them audited.

Note 3: Since Mr. X declares profit @ 5%, which is lower than the prescribed rate of 8% under PTS, he shall be required to maintain books of account and get them audited for AYs 2020-21 to AY 2025-26.

Note 4: Mr. A is required to maintain books of account and get them audited.

Note 5: Mr. A is required to maintain books of account. He is not required to get them audited as his total income is less than the basic exemption limit.

Note 6: Mr. A is required to maintain books of account and get them audited.

 

 

Decoding Section 44ADA

 

 

Legislative History

The PTS under section 44ADA, also popularly known as ‘’presumptive taxation regime for professionals’’, was first introduced by the Finance Act 2016. The intention was to provide a PTS for people who make a living from their profession. 

 

 

Coverage

 

Categories of taxpayers covered:

The taxpayers listed below, whose total gross receipts from their profession do not exceed INR 50 lakhs in a fiscal year, are eligible for PTS under Section 44ADA:

  • Resident Individual;
  • Resident Partnership Firm (not being an LLP)
 
Categories of professions covered:

Only professions referred to in Section 44AA(1) of the ITA can opt for PTS under Section 44ADA. This includes a person carrying on:

  • Legal, Medical, Engineering or Architectural profession;
  • Profession of Accountancy, Technical consultancy or Interior decoration;
    • Other Profession like Film artist: Film artists include an actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, and dress designer.

 

 

Percentage of deemed income

Under Section 44ADA, the taxable income of an eligible taxpayer is presumed to be 50% of the gross receipts from the eligible profession.

The taxpayer can voluntarily declare higher income in the tax return.

 

 

Other important points to be kept in mind

  • Advance Tax: The due date for payment of advance tax shall be the 15th day of March of such FY;
  • Mandatory Tax Audit: In the case where the taxpayer claims his income to be lower than the deemed income of 50% as specified in PTS under Section 44ADA, he shall be required to maintain books of account and get them audited, if his total income exceeds the maximum amount that is not chargeable to tax, i.e. the applicable basic exemption limit.
  • Additional deductions: All the deductions u/s 30 to 38 and, in the case of partnership firms, interest and salary/remuneration to partners would be deemed to have been allowed.
  • Additional disallowances: Any disallowance relating to cash payments above INR 10,000 for expenses, non-deduction of tax at source, etc. will not be required to be added back, as Section 44ADA overrides Sections 28 to 43C of the ITA.

 

 

Issues Under the Presumptive Tax Scheme

  • Section 44AD vis-à-vis section 68/69
  • When a taxpayer declares income under Section 44AD, whether he is under an obligation to prove that he has incurred the balance of gross receipts by way of business expenditure became an issue in Nand Lal Popli v. Dy. CIT [2016] 71 taxmann.com 246 (Chandigarh).

The assessee proposed 8% of the gross contract receipt of Rs. 37.75 lakhs as income.The Assessing Officer (AO) requested information on the 92% expenditure of Rs. 32.73 lakhs. The assessee presented a cash flow statement with a cash outflow of Rs.18.49 lakhs, besides payment from the bank to the extent of Rs.16.25 lakhs. In the absence of documentary evidence of the cash flow, the AO ultimately made an addition of Rs.32.24 lakhs as an unexplained expenditure.

The issue before the Tribunal was whether the AO can make an addition under Section 69C of the ITA for the expenditure incurred by the assessee based on the cash flow statement when the assessee has declared income under Section 44AD. The Tribunal held that Section 44AD does not place any obligation on the assessee to maintain books of account when he has declared income as per the presumptive provision. It held that the cash flow statement cannot be considered as keeping books of account. It also held that the assessee cannot be asked to prove to the satisfaction of the AO the expenditure of 92% of the gross receipts, as that would defeat the very purpose of presumptive taxation.

It observed that if the AO had independent evidence of the expenditure incurred/not incurred or had carved out the case out of the glitches of Section 44AD, then such an addition could have been possible. Thus, the Tribunal held that an addition towards unexplained expenditure cannot be made under section 69C when the income has been offered under Section 44AD.

  • Whether a taxpayer declaring income under Section 44AD could be subjected to tax under Sections 68/69 for the amounts credited in his bank account became an issue in CIT v. Surinder Paul Anand [2010[ 48 DTR (P. & H.) 135.

In the assessment, the assessee was asked to explain the cash deposit in his bank account and finally the addition of Rs.14,95,300/- was made to the returned income. The Court held that the assessee has opted for presumptive provisions and is exempted from maintaining books of account. It held that the assessee is under an obligation to explain the individual entry of a cash deposit only when such entry has no nexus with the gross receipts of the business. The assessee claimed before both the CIT (A) and the Tribunal that the said amount was part of business receipts and in the absence of any other contrary material or evidence, the cash deposits could not be taxed as unexplained or undisclosed income of the assessee. The Court held that there was no substantial question of law in the appeal and hence upheld the order of the Tribunal.

  • Section 44AD and disallowance under section 40(a)(ia)
  • In ITO v. Mark Construction [2012] 23 taxmann.com 398 (Kolkata), the assessee engaged in civil construction and disclosed profits exceeding 8% by opting for Section 44AD provisions. In the assessment, the AO called for books of account of the assessee and the assessee took a plea that the income was offered under Section 44AD and hence maintenance/production of books of account was not compulsory. The AO made an addition of Rs. 32,62,140/- by invoking Section 40(a)(ia). The Tribunal held that since the assessee has disclosed profits of more than 8% of the gross receipts, no disallowance under Section 40(a)(ia) could be made.

As may be seen from the above analysis, the provisions of Sections 44AD and 44ADA can be extremely relevant for assessees from the perspective of tax planning and tax compliance. It is important that assessees consider the extant provisions of PTS along with their applicability to the business situation at hand. Also, appropriate professional advice should be sought, wherever necessary, to ensure that the optimum benefit of the PTS provisions is availed while finalising the tax returns.

Image Credits: Photo by Olya Kobruseva 

The provisions of sections 44AD and 44ADA can be extremely relevant for assessees from the perspective of tax planning and tax compliance. It is important that assessees consider the extant provisions of PTS along with their applicability to the business situation at hand. Also, appropriate professional advice should be sought, wherever necessary, to ensure that the optimum benefit of the PTS provisions is availed while finalising the tax returns.

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Tax Withholding under Section 194R: CBDT Issues Additional Guidelines

The CBDT has, vide Circular No. 18 of 2022, dated September 13, 2022, aimed to remove difficulties on the implementation of TDS on benefits or perquisites under Section 194R of the Income Tax Act of 1961 “Act”). This circular is a continuation of Circular No. 12, issued by CDBT earlier, on June 16, 2022, providing guidelines on the scope and coverage of Section 194R of the Act. The Income Tax Department explicitly makes it clear that this Circular is only for the removal of difficulties in the implementation of provisions of Section 194R of the Act and does not impact the taxability of income in the hands of the recipient, which shall be governed by the relevant provisions of the Act.

Key Clarifications in Circular No. 18 of 2022

 

One-time loan settlement/waiver of loan

The provision of Section 194R of the Act shall not be applicable on one-time loan settlements entered with or waivers of loans granted to borrowers by specified banks or financial institutions.

 

Reimbursement of expenses incurred by a ‘Pure Agent’

Any expense incurred by a “pure agent,” as defined under the GST Valuation Rules, 2017 and which is in turn reimbursed by the service recipient, would not be treated as a benefit or perquisite for the purposes of Section 194R, and therefore the pure agent would not be liable to deduct TDS u/s 194R of the Act. It has been explained that in such cases, even the GST input credit ought to be availed of by the service provider and not the service recipient.

 

Interplay of 194R and other TDS provisions

The Circular clarifies that if reimbursement of out-of-pocket expenses (OPE) is already a part of the gross consideration and tax has been deducted on the gross consideration under sections 194J or 194C of the Act, then there would not be any further liability to deduct tax under section 194R of the Act.

 

Expenditure incurred on dealers’/business conferences

In case of a dealers’ conference to educate the dealers about the company’s products, it has been clarified that:

  • It is not necessary to invite all dealers to a conference for the expenses incurred for conducting the conference to not be reckoned as a benefit or perquisite for tax deduction.
  • Any overstay by a dealer beyond one day prior and one day after the date of the conference would be treated as a benefit or perquisite liable for deduction of tax under Section 194R.
  • Where it is not possible, owing to practical difficulties, to ascertain the actual number of dealers for whom certain expenses were incurred, which should be classified as a benefit/perquisite, then to avoid any further challenges, the taxpayer who has provided the benefit/perquisite may suo-moto disallow the said expenditure, and thereafter, there will not be any requirement to comply with the provisions of Section 194R.

 

Availability of depreciation on any capital asset (car) gifted as a benefit/perquisite

Where any capital asset is received as a gift and tax has been withheld under Section 194R, the recipient shall be eligible to claim depreciation under Section 32 of the Act on such asset. The Circular clarifies that the value of such a benefit/perquisite offered as ‘income’ in the income-tax return of the recipient shall be deemed to be ‘actual cost’ in the hands of the recipient for the purpose of calculating such depreciation.

 

Liability on Embassy or High Commissions

The Circular clarifies that certain embassies and high commissions are not required to deduct tax under Section 194R of the Act for the benefit/perquisite provided by such organisations.

 

Liability on issuance of bonus/right shares

Tax under Section 194R of the Act is not required to be deducted on the issuance of bonus or right shares issued by a company in which the public is substantially interested ( a listed company), as the overall value and ownership of their holding remain the same.

 

Practical Application

The above additional guidelines are welcome clarifications, as they certainly provide much needed clarity and certainty to some of the issues and concerns that were raised through representations by various industry and professional forums. As such, it is expected that the vexed provisions of Section 194R of the Act would now be less cumbersome in their practical application. Needless to say, there are still several issues in Section 194R and its application, which continue to bother the assessees regularly. It is hoped that CBDT, in the coming days, will continue with its avowed objective of making tax administration simple and provide further clarity on the other issues and challenges.

The Income Tax Department explicitly makes it clear that this Circular is only for the removal of difficulties in the implementation of provisions of Section 194R of the Act and does not impact the taxability of income in the hands of the recipient, which shall be governed by the relevant provisions of the Act.

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Have You Claimed Your Medical Expenses This Year?

Broadly, the medical expenses that can be claimed under the Income Tax Act 1961 (‘the Act”) in the income tax return[1] of an individual/HUF, comprise of the following:

  • Health Insurance/ Preventive Medical Check-up for Self and Family;
  • Maintenance or Medical Treatments for Disabled Dependents;
  • Medical Treatment for Dependents with Specified Diseases; and
  • Deduction for Person with Disability.

 

Health Insurance/Preventive Medical Check-up for Self and Family

As per section 80D of the Act, the taxpayer, being an individual or an HUF, can claim a deduction on premium paid towards medical insurance with the General Insurance Corporation of India or any other insurer approved by the Insurance Regulatory and Development Authority (IRDA) and medical expenditure incurred for

  • Self;
  • Spouse;
  • Parents;
  • Dependent children; and
  • Members of the HUF.

The deduction can be claimed from the following payments made by the taxpayer:

  1. A medical insurance premium paid for any of the foregoing;
  2. Actual expenditure incurred during the year on account of preventive/diagnostic health check-up for the health of any of the above;
  3. Medical expenditure incurred on the health of senior citizens (aged 60 years or above), whether taxpayer or any his/her family member, who are not covered under any health insurance scheme;
  4. The contribution is made to the Central Government Health Scheme, or any scheme as notified by the Government.

The above referred payments (barring the expenditure incurred on preventive health check-up) need to be mandatorily made through non-cash modes to avail the benefit.

The deduction in a year, would be subjected to the aggregate limits, as follows:

Particulars Premium Paid (Rs)   Maximum Tax Exemption u/s 80D (Rs)
  For
Self, Spouse and Dependent children		 For Parents  
Individual, Spouse, dependent children, and parents < 60 years 25,000 25,000 50,000

Individual, Spouse, Dependent Children < 60 years

but parents > 60 years

 25,000 50,000 75,000
Individual/Spouse, and parents > 60 years 50,000 50,000 100,000
Members of HUF 25,000 25,000 25,000

Note:

  • The above amount is inclusive of the preventive health check-up limit of Rs. 5,000 (Rupees Five Thousand only). The taxpayer can avail this tax benefit on the payment made towards the preventive health check-up undertaken for the taxpayer, spouse, children and parents.
  • If medical expenses are incurred for senior citizens (either self, spouse, dependent children or parents) not covered under any medical insurance, then the taxpayer can claim deduction for the said expenses incurred under the above limit of Rs 50,000.
  • If both the taxpayer and the parents are aged more than 60 years, for whom the medical covers has been taken, the maximum deduction that can be availed under this section is Rs 100,000. If the medical expenditure done on senior citizens (taxpayer/family and parents) are not covered under any health insurance, the taxpayer can claim a deduction for the said expenses within the said limit.

Based on the above reading, the maximum claim u/s 80D could be up to Rs 100,000 in a year.

Maintenance or Medical Treatments for Disabled Dependents

An individual or an HUF resident in India can claim for deduction under section 80DD of the Act in respect of the following:

  • expenditure for the medical treatment (including nursing), training and rehabilitation of a dependent, being a person with disability[1]; or
  • the amount paid to Life Insurance Corporation (LIC) or any other insurer or administrator or specified company in respect of a scheme for the maintenance of a dependent, being a person with disability.

Subject to a fixed deduction of Rs 75,000 if the disability is 40% or higher but less than 80% and Rs 125,000 if the disability is severe (80% or higher).

However, the deduction is subjected to the following conditions:

  • To claim the same, one must produce a certificate of disability from a prescribed medical authority to be filed on Form No. 10-IA[2] with the return of income.
  • The disabled individual should not have taken deduction under Section 80U.
  • It is essential that they should be wholly or mostly dependent on the taxpayer for their support as well as maintenance.

 

Medical Treatment for Dependents with Specified Diseases or Ailment

As per section 80DDB of the Act, an individual or an HUF resident in India can claim for the deduction of medical treatment of the specified diseases or ailments (Ref: Rule 11DD of the Rules), subject to:

  • Rs 40,000 per annum or the actual amount paid (whichever is less)
  • For senior citizens, Rs 100,000 per annum or the actual amount paid (whichever is less)

 

Deduction for Person with Disability

Section 80U of the Act provides deduction to people suffering from a disability[3]. As per this section, individuals suffering from a disability of at least 40% can claim tax benefit of Rs 75,000 per financial year (Rs 125,000 in case of severe disability of 80% and more). The taxpayer has to file Form No. 10-IA[4] producing certificate of disability from a prescribed medical authority with the return of income to claim the deduction.

The above deductions available to taxpayers should be carefully studied and optimised while finalising the income tax return.

For further advice and detailed assistance kindly contact any of the following individuals Fox Mandal and Associates:

Sandip Mukherjee – sandip.mukherjee@foxmandal.in

Salusalini Jha – salusalini.jha@foxmandal.in

Nikhil Bhise – nikhil.bhise@foxmandal.in

Akshita Bhandari – akshita.bhandari@foxmandal.in

References:

[1] Due date for filing FY 2021-22 tax return for individuals is 31st July, 2022.

[1] As defined in Sec2(i) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995

[2] Ref: Rule 11A of the Income Tax Rules

[3] As defined in Sec2(i) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995

[4]  Ref: Rule 11A of the Income Tax Rules

Here is a detailed list of medical expenses that an individual/HUF can claim while filing the annual income tax return under the Income Tax Act, 1961. 

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Key Pointers for Filing Income Tax Returns in India: 2022

The tax laws in India are perceived to be complicated by all. Having said that, the government of India, along with the Central Board of Direct Taxes (CBDT), has over the years tried to make tax compliance simpler for the taxpayers. It is important to note that paying the taxes due and filing tax returns is everyone’s duty as well as responsibility towards building the nation of our dreams.

With the due date for filing your income tax return for the Financial Year 2021-22, i.e., Assessment Year 2022-23, just round the corner, we bring to you a few pointers while filing your tax return, which can ensure that your tax filing process is smooth and hassle-free:

 

1. Assessees for whom the due date of 31st July is applicable:

All assesees, except the following, are required to file their returns on or before 31st July:

  1. Assessees who are subject to a tax audit and/or transfer pricing.
  2. Partners of Partnership Firms/LLP to whom tax audit and/or transfer pricing is applicable.
  3. A company.
  4. Any person whose accounts are required to be audited under any other law.

 

2. Income Tax Website and Account:

  • To file your income tax returns, you need to visit the Income Tax website at https://www.incometax.gov.in
  • If you are a first-time filer, you will have to register yourself by clicking on the “Register” tab at the top right corner of the ‘’Home’’
  • If you are a registered user, you can click on the “Login” tab at the top right corner of the home page.
  • Your Permanent Account Number [PAN] is the default user ID to login to the income tax portal.

 

3. Sources of Income:

As per the tax laws in India, there are primarily, 5 sources of income, which are explained as under:

  1. Income from Salaries: If you are a salaried employee, your income will be chargeable under this category. Furthermore, pensions earned by retired people will be taxed under this head. Also, taxable portion of the gratuity earned on retirement and leave encashments received from employers, is also taxed under this head. Please ensure you have your Form 16 received from your employer handy while you proceed to file your tax returns.
  2. Income from House Property: The rentals earned from your house property rented out is taxable under this head. Further, if you own multiple house properties which are not let out, each of such house properties, other than one[1] self-occupied house property, shall be deemed to be let out and a notional rental shall be considered as income. You would be allowed to reduce from the aforesaid rentals, the municipal taxes paid during the year towards the said let-out properties. Further, there would be a statutory deduction of a flat 30% from the net income of each house property. The interest component of your housing loan EMI paid on your housing loan will be reduced up to a maximum of Rs. 2 Lakhs from the said income.
  3. Income from Business and Profession: If you own a business or are a professional, your net profits will be taxed under this head. It is advisable to reconcile the turnover as per books of accounts and as per the Goods and Services Tax [GST] returns filed during the year.
  4. Income from Capital Gains: If you have sold any shares, mutual funds, bonds, land, commercial or residential property, or any other capital asset during the year, the net gains, i.e., sale price less cost/indexed cost of acquisition of the same, shall be taxable under this head, unless you have made an eligible reinvestment, which gives you exemption from the capital gain tax. It is to be noted that a ‘’switch out’’ from a mutual fund scheme and a ‘’switch into’’ another mutual fund scheme is also a taxable transfer on which capital gains tax is required to be paid. It is advisable to obtain a capital gain statement from your broker or download it from the application/software used to transact in shares and mutual funds, to help you calculate the long-term and short-term capital gains amounts.

Long-term capital losses can only be set off against long-term capital gains in the event of a loss; however, short-term capital losses can be set off against both long-term and short-term capital gains. Unexhausted losses can be carried forward for the next eight assessment years.

5. Income from other sources: This head of income is a residual head where incomes such as dividends, bank interest, etc. are taxed.

It is critical to scrutinise all your bank statements thoroughly and verify the income received during the year and also obtain relevant interest certificates from the bank to enable you to compute the due taxes appropriately.

 

4. New Regime vs. Old Regime:

It is necessary to estimate your tax liability, both as per the old regime and the new regime, at the beginning of the financial year itself, to enable you to plan your taxes accordingly. Having said that, the Income Tax Department has clarified that you may, while filing your tax returns, select an option different from the option selected while filing your declarations and providing investment details to your employer.

 

5. Treatment of losses:

In the event the return is not filed by the due date, you will not be allowed to carry forward losses from business, capital gains, and activity of owning and maintaining racehorses. However, losses from house property and unabsorbed depreciation can be carried forward even if the return is filed belatedly.

 

6. Return Form vis-a-vis Sources of Income:

Following are the ITR forms to be filed for the corresponding incomes:

  • ITR 1 – For residents with a total income of up to Rs.50 lakh from salaries, one house property, or other sources.
  • ITR 2 – For individuals and HUFs not having income from profits and gains of business or profession.
  • ITR 3 – For individuals and HUFs having income from profits and gains in business or profession.
  • ITR 4 – For Individuals, HUFs and Firms (other than LLPs) being a resident having total income up to Rs.50 lakh and income from business and profession computed under sections 44AD, 44ADA or 44AE (Presumptive Income).
  • ITR 5 – For persons other than- (i) individual, (ii) HUF, (iii) company and (iv) charitable trust, NGOs and similar organisations.

You can file the online utility of the aforesaid forms by logging into your income tax portal and clicking on E-File > Income Tax Returns > File Income Tax Return > Assessment Year – 2022-23 > Mode of filing: Online. You can also download the common Java utility for ITR 1 to 4 or ITR 5 from the Download tab on the income tax website, fill it in and submit it. The Income Tax Department also gives you the option to pre-fill your return using the data filed in the previous year by clicking on E-File > Income Tax Returns > Download Prefilled Data. Before submitting your return for the year, you must reconcile the information being submitted with the pre-filled data that is available on the portal against each assessee’s name, to ensure its correctness and also make necessary changes, wherever necessary.

 

7. Form No. 26AS and Annual Information Statement (AIS):

Before starting with the process of filling in details of income in the return of income, you should download Form No. 26AS from E-File > Income Tax Returns > View Form 26AS > click ‘view tax credit (form 26AS) < Assessment Year 2022-23 – View as HTML < Export as PDF, so as to ensure that all the incomes on which Tax Deducted at Source [TDS] has been deducted and the corresponding TDS amounts, are taken into consideration while calculating your taxes. In case Tax Collected at Source [TCS] has been collected from you, the credit  for that will be taken into account when calculating your tax payable.

Further, you need to download the AIS on the tab Services > Annual Information Statement (AIS), which has the information of various transactions reported to the Income Tax Department during the year. The same shall be taken into consideration, to the extent applicable, while computing the taxability during the year. (The password to open the AIS is your PAN in small case followed by your date of birth; eg: aaapa1111f15121960).

 

8. Deductions under Chapter VI A (80C, 80G, 80D, etc):

All the eligible deductions under Chapter VIA of the Income Tax Act 1961 [Act] can be claimed while filing the return of income, even if the same were inadvertently left out while making declarations, or while submitting actual proof of the same to the employer, for consideration on Form 16. The excess TDS deducted by the employers, consequently, can be claimed back as a refund.

 

9. Payment of Self-Assessment tax and Credit of Taxes Paid:

The taxes paid in the form of Advance Tax and TDS/TCS shall be available as a credit against the tax, cess, surcharge and interest as computed on the total income and the balance amount payable along with interest thereon shall be paid as self-assessment tax using challan 280 on https://www.tin-nsdl.com.

 

10. Consequence of late filing or non-filing of Income Tax Returns:

In case a taxpayer fails to file the return within the normal due date applicable to him, a penalty of Rs. 5,000 would be levied if the return is filed past the due date but before December 31st. In other cases, the fine could be up to Rs. 10,000. However, in the case of willful defaulters, failing to file the return can lead to a fine and even imprisonment.

 

11. Verification of the tax returns:

The return filed online needs to be verified by the taxpayer within 120 days from the date of filing. The tax return can be e-verified using the Aadhar OTP, Electronic Verification Code (EVC), or by using your net banking account with selected banks. If none of these options work, you may send a signed copy of the acknowledgment to CPC Bangalore. A tax return filed but not verified is treated as an invalid return by the I.T. department. It would mean that you have not filed the return at all.

 

12. Donations made to charitable institutions are eligible for deduction u/s 80G:

If you have made donations to charitable institutions and wish to claim a deduction for the same u/s 80G of the Act, kindly ensure such institutions have reported your donations to the Income Tax Department and obtained a certificate of donation on Form No. 10BE.

 

 
Note:
  • If your total income does not exceed Rs. 2,50,000 no tax is due. Further, if your total income does not exceed Rs. 5,00,000, you are eligible to claim a rebate u/s 87A to the extent of Rs. 12,500/-, which effectively would result in nil tax payable.
  • For non-resident taxpayers, only their Indian income is chargeable to tax in India.
  • In cases where Indian tax residents own foreign assets, including shares of foreign companies, foreign bank accounts, etc., the same needs to be disclosed in their income tax returns.
  • Every individual having a total income of over Rs 50 Lakh is required to give a list of his/her assets and liabilities at cost while filing his/her tax returns.
  • Though clarity on taxing crypto currencies came vide Finance Act 2022, the sale of crypto currencies prior to Finance Act 2022 would also be chargeable to tax as per the prevailing law. You may need to seek a detailed opinion if you have traded in crypto currencies and made a profit thereon.
  • If you are a legal heir to a taxpayer who has died during the year and has earned taxable income or is required to file his/her tax returns as per the law, you are required to register yourself as a ‘legal heir’ to such a deceased taxpayer through your Income Tax portal and file his/her tax return through your income tax portal using his/her PAN.
 

For further advice and detailed assistance in filing your Income tax returns kindly contact our following Fox Mandal and Associates representatives:

Sandip Mukherjee – sandip.mukherjee@foxmandal.in

Salusalini Jha – salusalini.jha@foxmandal.in

Nikhil Bhise – nikhil.bhise@foxmandal.in

Akshita Bhandari – akshita.bhandari@foxmandal.in

References:

[1] Increased to two in last Finance Act, subject to conditions being met.

With the due date for filing your income tax return for the Financial Year 2021-22, i.e., Assessment Year 2022-23, just round the corner, we bring to you a few pointers while filing your tax return, which can ensure that your tax filing process is smooth and hassle-free.

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Faceless Appeal Scheme 2021: A Forward-Looking Initiative

The Central Board of Direct taxes (“CBDT”), with an objective of bringing in more transparency in the appeal proceedings and “honoring the honest”, had introduced the “Faceless Appeal Scheme 2020”[1] (“Old Scheme”), on September 25, 2020. The Old Scheme was introduced with an aim to eliminate human interference between the taxpayer and the First appellate authority (Commissioner Appeals), thereby ensuring that the appeals are disposed in a fair manner and are not influenced by any relation and human biasness.

The Old Scheme was introduced with the noble intention of curbing malpractices, easing compliance and make appeal process seamless and faceless. However, there were some post implementation hiccups experienced and accordingly taxpayers requested certain modifications in the Old Scheme.

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

In this alert, we have made an effort to apprise the readers with the changes introduced in the New faceless appeal Scheme vis-à-vis the Old Scheme.

Key Changes in the New Faceless Appeal Scheme, 2021

The key changes brought in by the New Appeal Scheme are as follows:

  1. Mandatory personal hearing, if requested

In the Old Scheme, the appellant or his authorized representative had to make a request for personal hearing and the Chief Commissioner or Director General in charge of the Regional Faceless Appeal Centre (RFAC) had the discretion to approve such request, if he was of the opinion that the request is covered by the circumstances laid down by the CBDT.

In the New Scheme, there is no requirement for prescribed circumstances and the discretion for grant of personal hearing has been completely removed. CIT(A) shall allow personal hearing if requested by the appellant anytime during the course of the proceedings.

  1. Restructuring of the appeal center

In the Old Scheme, CBDT had set up a three-layer structure with National Faceless Appeal Centre (NFAC) at the top to conduct appeals in a centralized manner (nodal agency), followed by RFAC to support NFAC and Appeal Unit (AU) at the bottom, to facilitate the conduct of e-appeal proceedings and dispose them. In the composition structure, each AU unit had one or more Commissioner Appeals [CIT(A)].

In comparison, the New Scheme has done away with the RFAC and has set up a two-layered structure headed by NFAC and AU will directly coordinate with NFAC and conduct the appeal and dispose them. Further, in the New Scheme, each AU will have only one CIT(A).

  1. Elimination of review by multiple AUs

In the Old Scheme, the NFAC on receipt of draft order from AU, would  review the order and if the payable amount in respect of disputed issue was more than a specified amount, then send the draft order to another AU, other than the AU which had prepared it. In any other case, the NFAC would  examine the order based on the specified risk management strategy and then finalise the appeal or send the draft order to another AU.

The other AU who was assigned such case, would  either concur with the order or suggest variations as it would  deem fit. In case of variation, the NFAC would  assign the said appeal to another AU other than the one who had prepared or reviewed the draft order. The NFAC would then pass the final order, based on the order received from the last AU.

In the New Scheme, the CIT(A), after examining the submissions, shall now pass the order by digitally signing the same and send it to NFAC, along with details of penalty proceedings, if any, to be initiated therein.

Such order shall be final and will not be reviewed at multiple AUs as provided in the erstwhile scheme. NFAC shall communicate such order to the appellant and such other officers as may be prescribed.

  1. Penalty Proceedings

In the Old Scheme, AU in the event of any non-compliance during the appeal proceedings, had to send a recommendation to NFAC to initiate penalty proceedings. However, in the New Scheme, there is no need to send such recommendation and the CIT(A) can directly send the penalty notice through NFAC.

FM Comments:

The modifications provided in the New Scheme are certainly a move in the right direction by easing the process and building a robust appeal scheme. The CDBT, by removing the discretionary power of the authorities for grant of personal hearing, has also made an effort to meet the constitutional validity criteria, which has also been one of the matters, challenged before the Courts.

References: 

[1] Notification No 76/2020 dated 25 September 2020

[2] Notification No 139/2021 dated 28 December 2021

Image Credits: Photo by Arina Krasnikova from Pexels

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

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Decoding the India - US Transitional Approach on 2% Equalization Levy

Addressing tax issues arising in the digital economy has been a priority of the international community since past few years. In order to deliver a consensus-based solution and ensure that Multinational Enterprises (MNEs) pay a fair share of tax in the jurisdiction they operate, the Organization for Export Co-operation and Development (OECD) / G20, by way of a Statement/Deal had, on the 8th of October 2021, introduced a major reform in the international tax framework.  In all, 136 countries, including India and the USA, out of a total of 140 countries, have agreed to this Statement.

The Statement/Deal provides for an Inclusive Framework that requires countries to remove all digital services tax and other similar unilateral measures and provide for a Two-pillar solution, consisting of two components viz: Pillar One, which is about reallocation of an additional share of profit to the market jurisdictions and Pillar Two, consisting of minimum tax and subject to tax rules. For a detailed discussion on the OECD/G20 inclusive framework, kindly refer our article on OECD BEPS Framework: Recent Development.  

 

Post the issuance of the said Statement/Deal, on October 21, 2021, the United States of America (US), Austria, France, Italy, Spain, and the United Kingdom reached an agreement on a transitional approach to the existing Unilateral Measures, while implementing Pillar One. A similar transitional approach has been agreed by India and the US on the 24th of November and notified by way of a Press Release by the Government of India- Ministry of Finance, the same has been elaborated below: 

 

Press Release dated 24th November on India and USA Agreement on Equalization Levy 

 

As per the Press Release, India and the US have agreed that the same terms that apply under the joint statement released by the US with five European countries on 21 October 2021, shall apply between the US and India, during the interim period before Pillar One rules comes into effect.

 In light of the Press Release and 21 October joint statement, impact on India’s 2% EL could be as follows:  

 

  • India will not be required to withdraw the 2% EL until Pillar One takes effect.
  • India will allow a credit of the excess of 2% EL chargeable on non-resident (NR) e-commerce operator (NR EOP), belonging to a multinational enterprise (MNE), during the “interim period”, vis-a-vis the tax liability determined under Pillar One – Amount A, for the said interim period, once Pillar One rules are in effect. As per the Press Release, this interim period will begin from 1 April 2022, till the implementation of Pillar One or 31 March 2024, whichever is earlier.
  • The US will terminate its proposed trade actions against India regarding the 2% EL.
  • India and the US will remain in close contact to ensure that there is a common understanding of the respective commitments and endeavour to resolve any further differences of views on this matter through constructive dialogue.
  • The final terms of the India-US agreement are awaited and is expected to be issued by 1 February 2022.

 

FM Comments: 

While the fine print of this agreement between the India and US is still awaited, it would be interesting to see how the 6% EL on online advertisement revenues, are proposed to be dealt with, as apparently, the same does not seem to form a part of the deal. 

It also remains to be seen what kind of potential hiccups this deal would entail, should there be a delay in the implementation of Pillar One, beyond the time provided in the deal, and the potential impact of this on the business of MNEs. 

At the given point of time, the above seems to be merely a statement of intent by the two major economies, so as to streamline the long pending issues of digital taxation. One can only hope that the said deal is not a result of threat of trade actions by the US and would indeed be a win- win for both the countries. 

Image Credits: Photo by Antonio Quagliata from Pexels

Post the issuance of the said Statement/Deal, on October 21, 2021, the United States of America (US), Austria, France, Italy, Spain, and the United Kingdom reached an agreement on a transitional approach to the existing Unilateral Measures, while implementing Pillar One. A similar transitional approach has been agreed by India and the US on the 24th of November and notified by way of a Press Release by the Government of India- Ministry of Finance

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Additional Guidelines Issued on TDS/TCS Under Sections 194-O, 194Q & 206C(1H)

The Central Board of Direct Taxes (CBDT) has issued Circular No 20/2021 dated November 25, 2021, providing more clarification on deduction and collection of tax at source on certain transactions under sections 194-O, 194Q & 206C(1H) of the Income Tax Act.

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

In this regard, CBDT vide Circular no. 17/2020, dated 29.09.2020 and Circular no. 13/2021, dated 30.06.2021, issued guidelines to clarify the scope and applicability of the above sections and thereby removing the difficulties faced by the assessee.

In continuation to the above, to further remove the difficulties, CBDT with the approval of the Central Government (CG), has issued the following guidelines to clarify on the scope of the above TDS provisions:

 

Guidelines:

 

I. E-auction services carried out through electronic portal

It has been represented by various stakeholders involved in the business of e-auction services that provisions of section 194-O shall not be applicable to them based on the following arguments:

  • E-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported the client.
  • The price negotiations may happen directly between the parties and may not necessarily happen at the price discovered through e-auction process.
  • The transaction of purchase / sale takes place directly between the buyer and the seller party outside the electronic portal maintained by the auctioneer.
  • The e-auctioneer is not responsible for purchase / sale of goods except for limited purpose of price discovery.
  • Negotiation and payments terms happens only between the purchaser and seller offline and e-auctioneer does not have any further information or role to play to in this.
  • On the service charges payable to e-auctioneer, the client deducts TDS under the relevant provisions other than section 194-O of the Income tax Act (Act).

In this regard, it has been clarified by the CBDT that provisions of section 194-O shall not be applicable in cases where all the above features are cumulatively satisfied. Further, the buyer and seller would still be liable to deduct/ collect tax u/s. 194Q / 206C(1H) of the Act, as the case may be.

II. Adjustment of various State levies and taxes other than GST

It has been represented that while the clarification with respect to treatment of TDS on GST component is provided in the earlier Circular no. 13/2021, the same is silent on other non-GST levies such as VAT, Excise duty, Sales tax, etc.

In this regard, it has been clarified by CBDT that in case of purchase of goods exigible to other levies, if the component of VAT/Sales tax/Excise duty/CST, as the case may be, has been indicated separately in the invoice, then the tax is to deducted u/s. 194Q of the Act, without considering levies such as VAT/Sales tax/Excise duty/CST. However, in case of advance payment, the tax is to be deducted on the whole amount, as it will not be possible to identify the VAT/Sales tax/Excise duty/CST component to be invoiced in the future.

 

III. Applicability of Section 194Q of the Act in case where exemption has been provided under section 206C (1A) of the Act

Section 206C(1A) of the Act provides that, if the buyer furnishes to the seller a declaration in respect of  goods viz liquor, forest produce, scrap etc (specified in section 206C(1)) are to be utilized for the purpose of manufacturing, processing or producing article or thing or for the purposes of generation of power and not for trading purposes, than tax is not required to be collected. It has been requested to clarify whether the provisions of section 194Q of the Act will be applicable in such a case.  

Section 194Q of the Act does not apply in respect of those transaction where tax is collectible u/s. 206C [except sub-section (1H)]. Accordingly, it is noted that since section 206C(1A) exempts tax collection in respect of goods specified in section 206C(1),  it is hereby clarified that in such cases, the provisions of section 194Q of the Act will apply and the buyer shall be liable to deduct tax under the said section, if the conditions specified therein are fulfilled.

 

IV. Applicability of the provision of section 194Q in case of department of Government not being a public sector undertaking or corporation

It has been represented by both Central and State Government (department), to enquire if such department is required to deduct tax under the provision of section 194Q of the Act.

The provision of section 194Q requires tax to be deducted by a person, whose total sales, gross receipt or turnover from business carried on by that person, exceeds specified limit. Accordingly, it is clarified that in case department is not carrying any business or profession, the primary requirement of being considered as “buyer” will not be fulfilled. Hence, provision of section 194Q will not be applicable. However, if such department is carrying business or profession, then the provisions of section 194Q will be applicable.

In case where department is a seller, it is clarified that for the purpose of deduction of tax under section 194Q, department shall not be considered as “seller” and no tax should be deducted by the buyer.

In continuation to the above, it is further clarified that any other person, such as a public sector undertaking or corporation established under central or state Act, shall be liable to comply with provisions of section 194Q.

 

FM Comments:

The above are  welcome clarifications issued by the CBDT to bring more clarity and remove the hardship faced by the stake holders. However, there is still no clarity with respect to transactions where TDS / TCS is already deducted / collected and if by virtue of this clarification, the above provisions were not applicable, then whether in such cases refund can be claimed or not.

 

Image Credits: Photo by Nataliya Vaitkevich from Pexels

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

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OECD BEPS Framework: Recent Development

Addressing tax issues arising in the digital economy has been a priority of the international community since past several years. It aims to deliver a consensus-based solution and ensure Multinational Enterprises (MNEs) pay a fair share of tax in the jurisdiction they operate. After years of intensive negotiations, the Organization for Export Co-operation and Development (OECD) / G20 has recently introduced a major reform in the international tax framework for taxing the Digital Economy.

The OECD / G20 inclusive framework on Base Erosion and Profit Shifting (BEPS) [“IF”] has issued a Statement, on 8th October 2021, agreeing on a two pillar-solution to address the tax challenges arising from the digitalization of the economy. There are 136 countries, including India, out of a total of 140 countries, representing more than 90% of the global GDP, that have agreed to this Statement. All members of the OECD countries have joined in this initiative and there are four G20 country members  (i.e. Kenya, Nigeria, Pakistan & Sri Lanka) who have not yet joined. The broad framework of the two-pillar approach as per the Statement is as follows:

 

Pillar One

 

Introduction and applicability:

  • Pillar One focuses on fairer distribution of revenue and allocation of taxing rights between the market jurisdictions (where the users are located), based on a ‘’special purpose nexus’’ rule, using a revenue-based allocation.
  • Applicable to large MNEs with a global turnover in excess of  Euro 20 Billion and profitability above 10% (i.e. profit before tax)[1]. This revenue threshold is expected to be reduced to Euro 10 Billion, upon successful review, after 7 years of the IF coming into force.
  • The regulated financial services sector and extractive industries are kept out of the scope of Pillar One.

 

Calculation Methodology:

  • Such allocation will help determine the ‘’Amount A’’ under Pillar one.
  • The special-purpose nexus rule will apply solely to determine whether a jurisdiction qualifies for Amount A allocation based on which 25% of residual profits, defined as profit in excess of 10% of revenue, would be allocated to the market jurisdictions using a revenue-based allocation key.
  • Allocation vis-à-vis nexus rule will be provided for market jurisdictions in which the MNE derives at least Euro 1 Million  of revenue  [Euro 250,000  for smaller jurisdictions (i.e. jurisdiction having  GDP lower than Euro 40 Billion )]
  • Profits will be based on financial accounting income, subject to:
    • Minimal adjustments; and
    • Carry forward of losses
  • Detailed revenue sourcing rules for specific categories of transactions shall be developed to ensure that revenues are sourced to end market jurisdiction, where goods or services are consumed.
  • Safe harbour rules will be separately notified, so as to cap the allocation of baseline marketing and distribution profits of the MNE, which may otherwise already be taxed in the market jurisdiction.

 

Tax Certainty:

  • Rules will be developed to ensure that no double taxation of profits gets allocated to the market jurisdiction, by using either the exemption or the credit method.
  • Commitment has been provided to have mandatory and binding dispute prevention and resolution mechanisms to eliminate double taxation of Amount A and also resolve issues w.r.t transfer pricing and business profits disputes.
  • An elective binding dispute resolution mechanism for issues related to Amount A will be available only for developing economies, in certain cases. The eligibility of jurisdiction for this elective mechanism will be reviewed regularly.

 

Implementation:

  • Amount A will be implemented through a Multilateral Convention (MLC), which will be developed to introduce a multilateral framework for all the jurisdictions that join the IF.
  • The IF has mandated the Task Force on the Digital Economy (TFDE) to define and clarify the features of Amount A (e.g. elimination of double taxation, Marketing and Distribution Profits Safe Harbour), develop the MLC, and negotiate its content so that all jurisdictions that have committed to the Statement will be able to participate.
  • MLC will be developed and is expected to be open for signature in the year 2022, with Amount A expected to come into effect in the year 2023.
  • IF members may need to make changes to domestic law to implement the new taxing rights over Amount A. To facilitate consistency in the approach taken by jurisdictions and to support domestic implementation consistent with the agreed timelines and their domestic legislative procedures, the IF has mandated the TFDE to develop model rules for domestic legislation by early 2022 to give effect to Amount A.
  • The tax compliance will be streamlined allowing in-scope MNEs to manage the process through a single entity.

 

Unilateral Measures:

  • The MLC will require all parties to remove all digital service tax (DST) and other similar taxes (eg: Equalisation levy from India perspective) with respect to all companies and to commit not to introduce such measures in the future.
  • No newly enacted DST or other relevant similar measures will be imposed on any company from 8 October 2021 and until earlier than 31 December 2023 or coming into force of the MLC.

 

Pillar Two

 

Introduction:

 

  • Pillar Two consists of Global anti-Base Erosion Rules (GloBE) to ensure large MNEs pay a minimum level of tax thereby removing the tax arbitrage benefit which arises by artificially shifting the base from high tax jurisdiction to low tax jurisdiction with no economic substance.
  • Pillar Two is a mix of several rules, viz. (i) Income Inclusion Rule (IIR); (ii) Undertaxed Payment Rule (UTPR); and (iii) Subject to Tax Rule (STTR).
  • IIR imposes a top-up tax on parent entity in respect of low taxed income of a constituent entity
  • UTPR denies deductions or requires an equivalent adjustment to the extent low tax income of a constituent entity is not subject to tax under an IIR.
  • STTR is a treaty-based rule which allows source jurisdiction to impose limited source taxation on certain related-party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.
  • There would be a 10-year transition period for exclusion of a certain percentage of the income of intangibles and payroll which will be reduced on year on year basis
  • GloBE provides de minimis exclusion where the MNE has revenue of less than Euro 10 Million and profit of less than Euro 1 Million and also provides exclusion of income from international shipping.

 

Calculation Methodology:

 

  • Pillar Two introduces a minimum effective tax rate (ETR) of 15% on companies for the purpose of IIR and UTPR and would apply to MNEs reporting a global turnover above Euro 750 Million under country-by-country report.
  • The IIR allocates top-up tax based on a top-down approach, subject to a split-ownership rule for shareholdings below 80%. The UTPR allocates top-up tax from low-tax constituent entities, including those located in the Ultimate Parent Entities (UPE) jurisdiction. However, MNEs that have a maximum of EUR 50 million tangible assets abroad and that operate in no more than 5 other jurisdictions, would be excluded from the UTPR GloBE rules in the initial phase of their international activity.
  • IF members recognize that STTR is an integral part of Pillar Two for developing countries and applies to payments like interest, royalties, and a defined set of other payments. The minimum rate for STTR will be 9%, however, the tax rights will be limited to the difference between the minimum rate and tax rate on payment.
  • GloBE rules would not be applicable to Government entities, international organizations, non-profit organizations, pension funds or investment funds that are UPE of an MNE Group or any holding vehicle used by such entities, organizations, or funds.

 

Implementation:

  • Model rules to give effect to the GloBE rules are expected to be developed by the end of November 2021. These model rules will define the scope and set out the mechanics of the GloBE rules. They will include the rules for determining the ETR on a jurisdictional basis and the relevant exclusions, such as the formulaic substance-based carve-out.
  • An implementation framework that facilitates the coordinated implementation of the GloBE rules is proposed to be developed by the end of 2022. This implementation framework will cover agreed administrative procedures (e.g. detailed filing obligations, multilateral review processes) and safe-harbors to facilitate both compliance by MNEs and administration by tax authorities.
  • Pillar Two is proposed to be effective in the year 2023, with the UTPR coming into effect in the year 2024.

 

FM Comments :

 

With the introduction of the OECD/G20 inclusive framework on BEPS, OECD expects revenues of developing countries to go up by 1.5-2% and increase in overall reallocation of profits to developing countries of about USD 125 Billion. India, being a huge market to large MNEs, has always endorsed this global tax deal. However, with the introduction of this framework, India will have to abolish all unilateral measures, such as equalization levy tax and Significant Economic Presence (digital permanent establishment) provisions. MNEs will also have to re-visit their structure to ring-fence their tax positions based on the revised digital tax norms.  This Statement lays down a road map for a robust international tax framework w.r.t taxing of the digital economy,  not restricted to online digital transactions.

References

[1] Calculated, using an “averaging mechanism”, details of which are awaited.

Image Credits: Photo by Nataliya Vaitkevich from Pexels

With the introduction of the OECD/G20 inclusive framework on BEPS, OECD expects revenues of developing countries to go up by 1.5-2% and increase in overall reallocation of profits to developing countries of about USD 125 Billion. India, being a huge market to large MNEs, has always endorsed this global tax deal.

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