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45th GST Council Meeting: Sectoral Highlights

The 45th GST Council meeting held in Lucknow on 17th September 2021 saw quite a few revisions in GST rates, clarifications, extensions of timelines for concessional rates as well as extension of exemption. Apart from that the council recommended other trade facilitation measures and conducted pertinent discussion on anomalies in revenue stream arising out of earlier rounds of rate rationalisation and inclusion of petrol and diesels within the ambit of GST. Following is a sectoral analysis of changes recommended by the GST Council:  

Changes in the GST rates and clarifications  issued in the 45th GST Council Meeting:

 

A. Pharmaceutical Sector

Extension of existing concessional rates 

GST exemption on Amphotericin B and Tocilizumab has been extended from September 30, 2021, to December 31, 2021. 

 

Reduced rate of GST @5% available to COVID-19 medicines including Remdesivir, Heparin, 2-Deoxy-D-Glucosemade and monoclonal antibodies like Casirivimab and Imdevimab has been extended from September 30, 2021, to December 31, 2021 

 

Reduction in GST rates from 12% to 5%, till December 31,2021 
  • Pembrolizumab, sold under the brand name Keytruda used as an antibody in cancer immunotherapy to treat lung, stomach, head, and neck cancer. 
  • Itolizumab, an antibody used for patients with COVID-19. 
  • Posaconazole an antifungal agent. 
  • Infliximab used in treatment of arthritis. 
  • Favipiravir, Bamlanivimab & Etesevima used for COVID-19 treatment. 
GST Rate reduced to Nil 
Import of Infliximab, Zolgensma and Viltepso used in treating arthritis and Spinal-Muscular Atrophy, are exempted from Basic Customs Duty but attracts Integrated Goods and Services Tax [IGST] @12%. The GST Council has recommended reducing the IGST rate to Nil 
Clarification 
All laboratory reagents, falling under heading 3822, to attract GST @12%. 

B. Mid-Day Meal Services  

Reduction in GST rates  

To reduce the cost of serving food in Anganwadi under the Integrated Child Development Services Scheme and Mid-Day Meals Schemes, the GST Council has recommended reduction in GST on Fortified Rice Kernels classifiable under HSN 19049090, from 18% to 5%.  

C. Skill Training  

Reduction in GST rates  

Notification No.12/2017-Central Tax (Rate) dated June 28, 2017, provides for Nil rate of GST on skill training if 100% funded by the Government. The GST Council has recommended to extend this exemption to skill training for which the Government bears 75% or more of the expenditure.  

 

 

D. Oil and Gas Sector  

GST on Petrol & Diesel  

In response to the direction of the Kerala High Court, based on a writ petition to decide levy of GST on petrol and diesel, the member states of the GST Council have unanimously rejected the proposal and opted not to include petroleum products under the GST regime at this stage. 

 

Reduction in GST rates  

GST on biodiesel supplied to oil marketing companies (OMCs) for blending with diesel reduced from 12% to 5%. 

 

Trade Facilitation Measure 

The Director-General of Hydrocarbons (DGH) is empowered to issue an Essentiality Certificate to Exploration & Production (E&P) operators to undertake E&P operations in India. Based on the said certificate, E&P operators avail exemption from customs duty on goods imported for E&P operations. The said certificate is applied online. Under the Goods and Service Tax Regime, stock transfers are taxable. However, stock transfers by E&P operators stand exempted provided operators have NOC from the DGH. Operators apply for NOC through filing a physical application. To ease trade operations in the E&P sector, the GST Council recommends waiving the NOC requirement making the essentiality certificate an eligible document to undertake stock transfers without payment of tax. 

 

 

E. Metal & Mining Sector  

Increase in GST  

GST on ores and concentrates of metals classified under Chapter 26 of the Customs Tariff Act, 1975 under tariff heading 2601, i.e., iron, under tariff heading 2608, i.e., zinc, under tariff heading 2603, i.e., copper, under tariff heading 2606, i.e., aluminium, increased from 5% to 18%. 

 

Clarification 

It is clarified that services by way of grant of mineral exploration and mining rights attract GST rate of 18% w.e.f. 01.07.2017. 

 

 

F. Infrastructure and Construction Sector 

Increase in GST 
  • GST on supply of bricks increased from 5% to 12%.  
  • Composition scheme has been extended to brick kilns with effect from April 01, 2022. The dealers opting for the composition scheme will pay GST@6% on supply of bricks. Dealers not opting for composition scheme will have to pay GST @12% with input tax credit facility. 

 

GST has been increased from 12% to 18% on – 

  • Railway or tramway locomotives, rolling stock and parts thereof 
  • Railway or tramway track fixtures and fittings and parts thereof  

 

 

G. Renewable Energy Sector 

Increase in GST rates  

GST rate increased from 5% to 12% on specified renewable energy devices and parts classified under Chapter 84, 85 or 94 of the Customs Tariff Act, 1975. 

 

Clarification 

GST on setting up of a renewable energy system clarified. On December 31, 2018, the Government, through a Notification (27/2018), amended the law providing that if renewable energy devices were supplied along with a supply of other goods and taxable services towards setting up, then 70% of the gross consideration is to be deemed as ‘value of supply of goods’ attracting GST of 5% and the remaining 30 % shall be ‘value of services’ attracting GST @18%. GST Council clarifies that on specified Renewable Energy Projects, GST can be paid in terms of 70:30 ratio respectively for goods and services from July 01, 2017 to December 31, 2018 following the manner prescribed for the period on or after January 01, 2019. 

 

 

H. Food Sector 

 

Levy of GST  

Purchase of Mentha Oil [Peppermint Oil] from unregistered suppliers to attract GST @12% under reverse charge mechanism. 

 

Food Aggregators like Swiggy and Zomato, providing restaurant services, to collect GST @5% [w.e.f. January 01, 2022]. 

 

Clarification 

GST Council clarifies that Brewers’ Spent Grain (BSG), Dried Distillers’ Grains with Soluble (DDGS) and other such residues, are to be classified under heading 2303, which reads for “Residues of starch manufacture and similar residues, beet-pulp, bagasse and other waste of sugar manufacture, brewing or distilling dregs and waste, whether or not in the form of pellets” and shall attract GST @5%. 

 

It is clarified that scented sweet supari and flavoured and coated illachi fall under heading 2106, which reads for “food preparations not elsewhere specified or included (other than a roasted gram), sweetmeats, batters including idli/dosa batter, namkeens, bhujia, mixture, chabena and similar edible preparations in ready for consumption form, khakhra, chutney powder, diabetic foods” and attract GST @ 18%.  

 

Under the current tax structure, aerated drinks are classified under sub-heading 220210 attracting GST @28% plus a compensation cess of 12% and non-aerated drinks (including fruit juice-based drinks) are classified under sub-heading 22029920, attracting GST of 12% and sub-heading 22029100 [Other non-alcoholic beverages (other than tender coconut water and caffeinated beverages)] attracting GST @18%. GST Council clarified that “Carbonated Fruit Beverages of Fruit Drink” and “Carbonated Beverages with Fruit Juice” to attracts GST@ 28% with Cess of 12%. 

 

Tamarind seeds fall under heading 1209 of the Customs Tariff Act, 1975, which reads for “Seeds, fruit and spores, of a kind used for sowing” will attract Nil rate of GST, irrespective of its use.  

 

GST Council clarified that cloud kitchens/central kitchens are covered under ‘restaurant service’ and attract GST @5%, without input tax credit. 

 

Supply of Ice creams by Ice Cream parlour to attract GST @18%.  

 

Alcoholic liquor for human consumption is not classifiable as food and food products. 

 

 

I. Entertainment Sector  

Increase in GST  

GST Council recommends increasing GST on licensing services/ right to broadcast and show original films, sound recordings, and radio and television programmes from 12% to 18%.  

 

GST on services by way of printing and reproduction services of recorded media where content is supplied by the publisher (to bring it on parity with colour printing of images from film or digital media) classifiable under Service Accounting Code 9989, which reads for “Services by way of printing of all goods falling under Chapter 48 or 49 including newspapers, books (including Braille books), journals and periodicals], which attract CGST @6 % or @2.5% or Nil, where only content is supplied by the publisher and the physical inputs including paper used for printing belong to the printer” is increased from 12% to 18%.  

 

Clarification  

It is clarified that admission to amusement parks having rides etc. attracts GST @18% classifiable under Service Accounting Code 9996, which reads for “services by way of admission to amusement parks including theme parks, water parks, joy rides, merry-go-rounds, go-carting and ballet and not classifiable as services by way of admission to entertainment events or access to amusement facilities including casinos, race club, any sporting event such as Indian Premier League attracting GST @28%  

 

 

 

J. Mobility Sector  

 

Extension of existing concessional GST rates 

The 25th GST Council Meeting, held in New Delhi on January 18, 2018, proposed that the transportation of goods from India to outside India be exempted from GST until September 30, 2018. Accordingly, vide Notification No.2/2018 – Integrated Tax (Rate), dated January 25, 2018, the Central Government amended Notification No. 9/2017 – Integrated Tax (Rate), dated June 28, 2017, exempting services of transportation of goods by air and sea from India to outside India from IGST until September 30, 2018. This exemption was subsequently extended till September 2021.  

 

Now, the 45th GST Council meeting has decided to extend the above exemption up to September 09, 2022. 

 

GST on E-Commerce Operators  

Service by way of E-Commerce Operators i.e., Ola & Uber, are being made liable to pay tax on transport of passengers [w.e.f. January 01, 2022]. 

 

Reduction in GST  

The GST Council recommends that GST on services by way of grant of National Permit to goods carriages on payment of fee be redeuced from 18% to Nil. 

 

GST on Retro fitment kits for vehicles used by the physically disabled currently taxed @28% as normal vehicle as Tariff Item 87112019 reduced to 5%.  

 

Clarifications 

The GST Council recommends exempting overloading charges at toll plazas, being akin to toll. 

 

The GST Council clarified that the service of ‘giving on hire’ classifiable under Service Accounting Code 9966, which reads for, “Services by way of giving on hire – (a) to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers; or (aa) to a local authority, an Electrically operated vehicle meant to carry more than twelve passengers; or Explanation.- For the purposes of this entry, “Electrically operated vehicle” means vehicle falling under Chapter 87 in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) which is run solely on electrical energy derived from an external source or from one or more electrical batteries fitted to such road vehicle. (b) to a goods transport agency, a means of transportation of goods. (c) motor vehicle for transport of students, faculty and staff, to a person providing services of transportation of students, faculty and staff to an educational institution providing services by way of pre-school education and education upto higher secondary school or equivalent” in addition to “Services by way of giving on hire – (a) to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers; or (aa) to a local authority, an electrically operated vehicle meant to carry more than twelve passengers” shall also include the supply of renting of vehicle by the State Transport Undertakings and Local Authorities and it would qualify for exemption from GST. 

 

 

Other trade facilitation measures taken up in the 45th GST Council Meeting:

 

Sending Goods for Job Work  

GST Law requires a registered manufacturer to file a declaration in Form GST ITC-04 on supplying goods for job work. It is filed once every quarter if the manufacturer sends inputs or capital goods on job work and receives it back or sends inputs or capital goods to another job worker. Requirement of filing FORM GST ITC-04 under Rule 45 (3) of the CGST Rules, 2017 has been relaxed to provide that taxpayer whose annual aggregate turnover in preceding financial year is above Rs.5 crores shall furnish ITC-04 once in six months whereas taxpayer with annual aggregate turnover of up to Rs.5 crores in preceding financial year to furnish ITC-04 annually. 

 

Transfer of cash ledge balance between distinct persons 

GST Council recommends allowing transfer of unutilized balance in CGST and IGST cash ledgers between entities having common PAN but registered in different states without going through the refund procedure. Presently, if a taxpayer has any cash balance unutilized due to TCS, TDS or excess deposit, they have to avail refund and cannot adjust such excess with GST liability arising in other states owing to ‘additional place of businesses’. The relaxation will ease the working capital requirements for the entities operating in multiple states. 

 

Issue of Tax Invoice 

In cases where an e-invoice is generated by the registered person under Rule 48(4) of the CGST Rules, 2017 [manner of issuance of tax invoice], it is proposed to waive off the requirement of carrying the physical copy of the tax invoice. 

 

Other clarifications  issued in the 45th GST Council Meeting:                                             

 

Clarification regarding debit note to avail Input Tax Credit   

Sub-section 4 of Section 16 provides that a registered person shall not be entitled to take the input tax credit in respect of any invoice or debit note for the supply of goods or services or both after the due date of furnishing of the return under Section 39 of the CGST Act following the end of the financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier. It is clarified that, w.e.f. January 01, 2021, the date of issuance of debit note (and not the date of underlying invoice) shall determine the relevant financial year for the purpose of Section 16(4) of the CGST Act, 2017.  

 

Interpretation of the term “merely establishment of a distinct person”  

 

The GST Council has clarified that a person incorporated in India under the Companies Act, 2013, and a person incorporated under the laws of any other country shall be treated as separate legal entities and supplies of services between the two will not be barred by Section 2(6)(v) of the IGST Act, 2017, and will be considered as ‘export’. 

 

Streamlining of GST compliance processes 

  • Aadhaar authentication to be made mandatory for filing refund claim and application for revocation of cancellation of registration.
  • A registered person shall not be allowed to furnish FORM GSTR-1 in case of non-filing of FORM GSTR-3B for the preceding month and late fee for delayed filing of FORM GSTR-1 to be auto-populated and be collected in FORM GSTR-3B for the succeeding month. This will be effective from 1st January 2022.

Image Credits:

Image by <a href=”https://pixabay.com/users/photomix-company-1546875/?utm_source=link-attribution&amp;utm_medium=referral&amp;utm_campaign=image&amp;utm_content=5610295″>Photo Mix</a> from <a href=”https://pixabay.com/?utm_source=link-attribution&amp;utm_medium=referral&amp;utm_campaign=image&amp;utm_content=5610295″>Pixabay</a>

The 45th GST Council meeting held in Lucknow on 17th September 2021 saw quite a few revisions in GST rates, clarifications, extensions of timelines for concessional rates as well as extension of exemption. Apart from that the agenda included other trade facilitation measures, pertinent discussion on anomalies in revenue stream arising out of earlier rounds of rate rationalisation and inclusion of petrol and diesels within the ambit of GST.

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Income Tax Due Date Extension: Return of income and Various Audit Reports

In view of the difficulties faced by the taxpayers and other stakeholders in e-filing of Return of Income (‘ROI’) and various audit reports for the Assessment Year (AY) 2021-22, the Central Board of Direct Taxes (‘CBDT’), vide Circular No. 17/ 2021 dated 9 September 2021, has notified the income tax due date extension for filing of return and various audit reports. The same have been summarized as under:

Income tax due date extension and relaxation for filing of return and various audit reports under the Income-tax Act, 1961:

Sr No

Compliance (AY 2021-22)

Original Due Date

Existing Due Date[1]

Extended Due Date[2]

1

ROI due date for taxpayers (such as individuals, firms, etc. not liable to audit)

31 July 2021

30 September 2021

31 December 2022

2

Furnishing of various audit reports (such as tax audit report u/s 44AB of the Act)

30 September 2021

31 October 2021

15 January 2022

3

Furnishing of transfer pricing report with respect to international / specified domestic transactions under section 92E of the Act

31 October 2021

30 November 2021

31 January 2022

4

ROI due date for taxpayers who are required to get their accounts audited under the Act or any other law for the time being in force (excluding taxpayers covered under Sr. No. 5 below)

31 October 2021

30 November 2021

15 February 2022

5

ROI due date for taxpayers who are required to furnish transfer pricing report under section 92E of the Act

30 November 2021

31 December 2021

28 February 2022

6

Belated / Revised ROI

31 December 2021

31 January 2022

31 March 2022

 

 

Clarification on interest calculation following the Income Tax due date extension:  

It is pertinent to note that, although, the due date for furnishing the ROI have been extended, however, the extended due date shall not be applicable for the purpose of computing interest under section 234A of the Act in a scenario where the payment of self-assessment tax exceeds INR 1,00,000.  

It is further clarified that, in case of a resident senior citizen not having any income chargeable to tax under the head business or profession, the tax paid till the original due date of filing of ROI shall be treated as an advance tax and accordingly no interest shall be chargeable on such amount.

 

Reason for the Income Tax due date extension:

The CBDT has launched the new income tax e-filing portal on 7 June 2021. However, since its launch, the taxpayers are facing various technical glitches in filing of various forms, certificates, and reports on this portal. In view of the difficulties faced, the ‘Finance Minister’ has given a deadline of 15 September 2021 to Infosys to resolve all the technical glitches such that taxpayers and professionals can work seamlessly on the portal. However, even if the technical glitches are resolved within the said date, it would leave a very short period for the taxpayers/professionals to file the return of income and audit reports on the portal.

Thus, the CBDT acknowledged the hardship caused to the various taxpayers and other stakeholders and accordingly extended the various dues dates with respect to filing of return of income and various audit reports under the Act. This, indeed, is a welcome move and provides much needed relief to the taxpayers.

Prior to this, the CBDT had issued Circular No. 16/ 2021, dated 29 August 2021, and extended the due dates w.r.t various other direct tax compliances.  

 

References:

[1] Circular No. 9/2021 dated 20 May 2021

[2] Circular No 17/2021 dated 9 September 2021 and press release dated 9 September 2021

Image Credits:

Photo by freestocks on Unsplash

The CBDT acknowledged the hardship caused to the various taxpayers and other stakeholders and accordingly extended the various dues dates with respect to filing of return of income and various audit reports under the Act. This, indeed, is a welcome move and provides much needed relief to the taxpayers.

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Extensions Granted for e-Filing of Various Tax Forms

In view of the difficulties faced by the taxpayers and other stakeholders in electronic filing of various forms, resulting in hardship and difficulty vis-à-vis complying with various due dates under the Income tax Act, 1961 (‘the Act’), the Central Board of Direct Taxes (‘CBDT’), vide Circular No. 16/ 2021, dated 29 August 2021, has extended the due dates w.r.t various direct tax compliances. The same have been summarized as under:

Relaxation and extension of time limits for electronic filing of various forms under the Income-tax Act, 1961

Sr NoCompliance ParticularsOriginal Due DateExtended Due Date[1]
1

Application for registration or intimation or approval under Sections 10(23C), 12A, 35(1)(ii)/(iia)/(iii) or 80G of the Act in Form No. 10A

30 June 202131 March 2022
2

Application for registration or approval under Sections 10(23C), 12A or 80G of the Act in Form No. 10AB

28 February 202231 March 2022
3

Equalization Levy Statement in Form 1 for Financial Year 2020-21

30 June 202131 December 2021
4

Quarterly Statement in Form 15CC to be furnished by Authorized Dealer in respect of foreign remittances made for the quarter ended 30th June 2021

15 July 202130 November 2021
5

Quarterly Statement in Form 15CC to be furnished by Authorized Dealer in respect of foreign remittances made for quarter ending on 30th September 2021

15 October 202131 December 2021
6

Uploading declaration received from recipients in Form No 15G / 15H for quarter ended 30th June 2021

15 July 202130 November 2021
7

Uploading declaration received from recipients in Form No 15G / 15H for quarter ending on 30th September 2021

15 October 202131 December 2021
8

Intimation by Sovereign Wealth Fund in respect of investments made by it in India in Form II SWF for the quarter ended 30th June 2021

31 July 2021

30 November 2021

9

Intimation by Sovereign Wealth Fund in respect of investments made by it in India in Form II SWF for the quarter ending on 30th September 2021

31 October 202131 December 2021
10

Intimation by a Pension Fund in respect of investment made by it in India in Form No. 10BBB for the quarter ended 30th June 2021

31 July 2021

30 November 2021

11

Intimation by a Pension Fund in respect of investment made by it in India in Form No. 10BBB for the quarter ending on 30th September 2021

31 October 202131 December 2021
12

Intimation, in Form 3CEAC, by a constituent entity (resident in India) of an international group, the parent entity of which is not resident in India

30 November 202131 December 2021
13

Reporting in Form 3CEAD by a parent entity or an alternate reporting entity or any other constituent entity, resident in India

30 November 202131 December 2021
14

Intimation on behalf of an international group under proviso to section 286(4) in Form No. 3CEAE

30 November 202131 December 2021

Further, considering the difficulties being faced in issuing and amending Form No 3, which is a prerequisite for making payment by the declarant under Vivad se Vishwas Act, 2020 (‘VSV Act’), the CBDT, vide Notification No. 94/2021[2] dated 31 August 2021, has also extended the last date of payment (without any additional amount) under VsV Act from 31 August 2021 to 30 September 2021.

However, it is further clarified that there is no change in the last date for payment of the amount (with additional amount), which remains as 31 October 2021.

References:

[1] Circular No 16/2021 dated 29 August 2021 and Press Release dated 29 August 2021

[2] Notification No. 94/2021F.No.IT(A)/01/2020-TPL (Part-I)-(Part- I) dated 31 August 2021 and Press Release dated 29 August 2021

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Photo by Nataliya Vaitkevich from Pexels

The CBDT, vide Notification No. 94/2021 dated 31 August 2021, has also extended the last date of payment (without any additional amount) under the Vivad se Vishwas Act from 31 August 2021 to 30 September 2021.

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Taxation (Amendment) Bill, 2021: Regaining Investor Confidence

The retrospective clarificatory amendment regarding taxability of indirect transfers and consequent demand raised in a few cases, had created doubts and serious concerns for potential investors in our country and had also tarnished India’s image in the international community. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic, is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment.  With this objective in mind, the Hon. Finance Minister of India has proposed this Taxation Laws (Amendment) Bill 2021 (“the Bill’), to put an end to the protracted litigation on this subject matter.

 

The issue regarding taxability of indirect transfer of assets located within the country, by transferring shares of an intermediary foreign company, was first analyzed in the case of Vodafone International Holdings (‘Vodafone’). In that case, Vodafone had acquired 100 percent shares of a Cayman Island based subsidiary company, from Hutchison Telecommunication International Ltd. (‘HTIL’), which was holding 67 percent controlling interest in Hutchison Essar Limited (‘HEL’), an Indian Joint venture company. Through this transaction, Vodafone had indirectly acquired a controlling interest of 67% in HEL, without triggering any taxable event in India. However, the Indian Revenue authorities had served a notice on Vodafone for not withholding tax under section 195 of the Indian Income Tax Act, 1961 (‘the Act’) on the consideration that was paid by it to HTIL.

The controversy was finally settled by the Hon’ble Supreme Court (‘SC’) in 2012 in favour of Vodafone[1]. The SC had ruled that the word “through” in section 9 of the Act does not mean “in consequence of” and “sale of share in question to Vodafone, did not amount to transfer of capital asset within the meaning of section 2(14) of the Act”. Accordingly, an indirect transfer of Indian assets by transferring shares in a foreign company was not chargeable to tax in India and therefore was not liable to any withholding tax.

Retrospective Amendment in Finance Act, 2012:

In order to override the SC decision and tax such Indirect transfer transactions, the Central Board of Direct Taxes (CBDT) had introduced an amendment under section 9(1) of the Act, which was made effective retrospectively from 01 April 1962. The Finance Act, 2012 had inserted a clarificatory Explanation 4 and Explanation 5 to section 9(1)(i), as under:

“Explanation 4— For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.

Explanation 5— For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”

The above retrospective amendments created doubts in the minds of the stakeholders regarding the stability of India’s tax laws and also invited huge criticism and embarrassment at the international level.

Pursuant to this retrospective amendment, income tax demand had been raised in seventeen cases by the Revenue authorities. In four cases, the aggrieved taxpayers had preferred arbitration under India’s Bilateral Investment Protection Treaty with the United Kingdom and the Netherlands, respectively. Recently, the respective Arbitration Tribunals have, in the case of Vodafone International Holding BV vs. The Republic of India as well as in Cairn Energy PLC vs. The Republic of India, ruled in favour of the assessee and against the Government of India. The government of India has challenged both this arbitration award.

Proposed Amendment:

The Bill [2] proposes to amend the Act and abolish the retrospective tax on indirect transfer of Indian assets, if the transaction was undertaken before 28 May 2012 [3].

The amendment proposes to insert three provisos (fourth, fifth and sixth) under Explanation 5 to section 9(1)(i), thereby nullifying:

  • any pending or concluded assessment or reassessment; or
  • any order enhancing the demand / reducing the refund; or
  • any order deeming a person to be an “assessee in default” for non-withholding of tax; or
  • any order imposing a penalty

with respect to any income accruing or arising from the transfer of an Indian asset pursuant to the transfer of shares in a foreign company.

Therefore, all assessments or rectification applications (pending/ concluded) before the Revenue authorities, to the extent it relates to the computation of income from any indirect transfer of assets, shall be deemed to have concluded/ have never been passed without any additions.

Specified Conditions:

Relief under the proposed amendment would be available only to assessees fulfilling the following specified conditions:

  • The assessee shall either withdraw or submit an undertaking to withdraw any appeal filed before the Tribunal, High Court or Supreme Court with respect to the indirect transfer, in such form and manner as may be prescribed [4];
  • The assessee shall either withdraw or submit an undertaking to withdraw any proceeding for arbitration, conciliation or mediation, with respect to the indirect transfer, in such form and manner as may be prescribed [3];
  • The assessee shall furnish an undertaking waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to indirect transfer in such form and manner as may be prescribed [3].

Pursuant to fulfillment of the specified conditions, where any amount becomes refundable to the person referred to in the fifth proviso, then, such amount shall be refunded to such person, without any interest on such refund under section 244A of the Act.

FM Comments:

The amendment is a proactive step aimed at neutralizing the criticism and embarrassment caused by retrospective amendment and regaining the stakeholder’s confidence in Indian judicial system. Such measures from the Government will certainly create a positive sentiment and a sense of tax certainty amongst the investors and hopefully, help in attracting incremental foreign investment into the country, which will play an important role in promoting faster economic growth and development.

 

References:

[1] Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 (SC)

[2] President is yet to give his assent on the said Amendment Bill

[3] Date on which Finance Bill, 2012 received assent of the President

[4] Form for submitting undertaking is yet to be prescribed

 

Image Credits: Photo by Michael Longmire on Unsplash

Such measures from the Government will certainly create a positive sentiment and a sense of tax certainty amongst the investors and hopefully, help in attracting incremental foreign investment into the country, that will play an important role in promoting faster economic growth and development.

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India Needs New Regulations - But Simplification of Compliance is Just as Critical

In earlier posts, I have touched upon the need for Indian laws to be updated to better reflect the current environment and foreseeable changes to it brought about by various forces, primarily technology-led innovation. This is not just because of the need to plug legal loopholes that are exploited to the nation’s detriment but also with the objectives of streamlining compliance and better enforcement.

 

Recently, the union government did exactly this when it announced a new set of rules to govern the operations of drones in India. A new draft of the Drone Rules, 2021, now out for public consultation, will, when approved and notified, replace the UAS Rules, 2021, which were announced in March 2021. The fact that the government has come out with a new set of rules within 4 months of issuing the earlier version is a welcome sign of change, as it signals recognition of a rapidly-changing environment as well as the importance of timely and appropriate responses.

Changes are aimed at simplification and less regulatory control

The new rules are remarkable for other reasons as well. At about 15 pages in length, the new rules are only a tenth of the earlier rules. The changes are not limited to the form; there are substantive changes too. The new rules seek to do away with a large number of approvals (e.g., Unique Authorization Number, Unique Prototype Identification Number etc.).  Licensing for micro drones for non-commercial use has been done away with. Recognizing the immense potential for drones to revolutionize our society and economy, the government proposes to develop “drone corridors” for cargo delivery. Prior authorization of drone-related R&D organizations is being removed. A drone promotion council is to be set up, in order to create a business-friendly regulatory regime that spurs innovation and use of drones. All this augurs well for the development of a robust drone ecosystem in India.

Implementing the “spirit” of underlying regulations is vital

The change to the drone rules is a welcome step- just as the consolidation of 29 of the country’s labour laws into four Codes during 2019 and 2020 was. But rationalization becomes futile if there is no element of reform- e.g., doing away with requirements that have outlived their utility or need significant changes to remain relevant in the current environment? There were many expectations around the Labour Codes, but in the months that followed, it is fair to say that there was also much disillusionment amongst industry stakeholders because sticky issues, such as the distinction between “employees” and “workers”, payment of overtime, role of facilitator-cum-inspector etc., remained.

Simplifying compliance is necessary to improve “ease of doing business” further

The World Bank’s 2020 “ease of doing business” report ranks India 63rd; we were ranked 130 in 2016. The 2020 report considered three areas: business regulatory reforms (starting a business, paying taxes, resolving insolvency etc.); contracting with the government, and employing workers. 

But there are miles to go before we sleep. To ensure that India’s entrepreneurial energies and creative intelligence are directed to areas that will be critical in the years to come- e.g., space, AI, robotics, electric vehicles, clean energy etc. all need new regulations or revamp of existing legislations and rules. But this alone will not suffice. Implementing the spirit, and not just the letter of the law and rules and the simplification of regulatory compliance are important angles that government must pay attention to. These are going to be key determinants in improving our “ease of doing business”.

 

Technology is a necessary enabler but it is not sufficient

All regulatory filings- whether for approvals or compliance- should ideally be enabled in digital format. Digital dashboards in the government and other regulatory bodies should facilitate real-time monitoring. Only exceptions or violations should need further actions. To be sure, the government has initiated some steps in this direction- e,g., “faceless” interactions between business and the Income Tax authorities with the intention to reduce human interventions and thus, the possibility of corruption. But if the underlying income tax portal itself is not working properly, as was widely reported soon after it was launched, the desired outcomes will not be achieved.

Moreover, it is not just about having the right technology platforms in place. It is equally critical to bring about a mindset change in the administrative machinery that helps political leadership formulate policy and thereafter, enable implementation and performance monitoring.

Given India’s large domestic market and attractiveness as a base for exports, we as a nation stand on the threshold of a phase of significant economic growth. Many Indian entrepreneurs are establishing businesses overseas; this means that the benefits of jobs, tax revenues and IPR creation all move to other jurisdictions. The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

Image Credits: Photo by Medienstürmer on Unsplash

The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

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Deduction of Tax at Source under Section 194N Restrained

The Kolkata High Court has passed an interim order restraining the deduction of tax at source under section 194N of the Income Tax Act till 30 September 2021 and directed that the matter be scheduled for final hearing after a period of eight weeks. The constitutional validity and legality of section 194N of the Act were challenged, by way of a writ petition, before Kolkata High Court in the case of Amalgamated Plantations Pvt. Ltd. & Anr.[1]

Section 194N – In Brief

The Finance Act, 2019 had inserted Section 194N under the Income-tax Act, 1961 (“the Act”), with effect from 1 September 2019, which mandates the deduction of tax at source at the rate of 2% on cash withdrawals from, inter alia, a banking company, on an amount exceeding INR 1 crore during the relevant tax year. The intention of introducing such provision under the Act was to discourage cash transactions and move towards cashless economy.

The Finance Act, 2020 substituted the above provisions to expand its scope. The revised threshold limit and rate of tax under section 194N of the Act have been summarised as follows:

Aggregate cash withdrawals in a tax year Rate of TDS
ITR of last 3 years filed ITR of last 3 years not filed
Up to INR 20 lakhs NIL NIL
Exceeds INR 20 Lakhs up to INR 1 crore NIL 2%
Exceeds INR 1 crore 2% 5%

The constitutional validity and legality of section 194N of the Act were challenged, by way of a writ petition, before Kolkata High Court in the case of Amalgamated Plantations Pvt. Ltd. & Anr.[1] (“the Petitioner”)


Is Section 194N beyond the legislative competence of the Parliament?


The Petitioner contended that the provisions of section 194N of the Act are beyond the legislative competence of the Parliament.

In this regard, the Petitioner placed reliance on Entry 82 of List I of Schedule VII of the Constitution of India, which empowers the Parliament to enact laws for imposition, collection and levy of tax on ‘income’. It was contended that the Parliament cannot legislate a provision for deduction of tax at source on an amount which is not an ‘income’.

The Petitioner further placed reliance on the decision of the Hon’ble Kerala High Court in the case of Kanan Devan Hills Plantations Company Pvt. Ltd[1] wherein, on a similar issue, the Kerala HC has admitted the writ petition and granted stay on deduction of tax at source under section 194N of the Act.

 

Interim Order on Section 194N

The Kolkata HC observed that the afore-mentioned order of Kerala HC has not been further challenged and the said interim order is still existing. It also observed that the Kerala HC, on the same issue, has passed series of orders admitting writ petitions and staying deduction of tax under section 194N of the Act.

Considering the above, the Kolkata HC has passed an interim order restraining the deduction of tax at source under section 194N of the Act till 30 September 2021 and directing that the matter be scheduled for final hearing after a period of eight weeks. In the interim, the Court has also directed that the Revenue authorities (“the Respondent”) and the Petitioner can file affidavit-in-opposition & reply thereof, respectively.

 

FM Comments:

The interim order of the Kolkata HC restraining the deduction of tax at source under section 194N of the Act is indeed a landmark order. The same should go a long way in deciding the constitutional validity and legality of this controversial provision in the law.

However, in the interim, it would be worthwhile to examine whether the benefit of the above order can be availed by other taxpayers at large.

At this juncture, it is also pertinent to highlight the fact that, although the intention of the legislature was to move towards a digital and cashless economy, one cannot lose sight of the fact that cash withdrawals from banks, by no stretch of imagination, can be considered, as ‘income’ earned by the recipient. As such, the collection of tax on such amounts ought to be treated as violative of the basic principles enshrined under our income-tax law.

If the issue is finally decided against the Revenue authorities, it would be an embarrassing setback vis-à-vis the Government’s significant efforts in moving towards a cashless economy.

Collection of tax on an amount that is not an ‘income’ of the recipient was an extreme step taken by the Government and going forward, more pragmatic approach may be expected to achieve the goal of a cashless and digital economy.

References:

[1] WPA 10826 of 2021

[2] WP (C) No. 1658 of 2020 dated 13/08/2020

Image Credits: Photo by Mathieu Stern on Unsplash

The Finance Act 2020 had expanded the scope of Section 194N, which earlier mandated the deduction of tax at source for cash withdrawals above a certain limit, by revising the threshold. The section has been challenged as ultra-vires. 

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Tax Alert: Latest COVID-19 Related Relaxations and Exemptions Issued by the Government

In view of the prevailing COVID-19 pandemic situation in the country, resulting in hardship and difficulty vis-à-vis complying with various due dates under the Indian Income tax Act, 1961 (‘the Act’) and causing severe impact on the cash flows, the Central Board of Direct Taxes (‘CBDT’) has time and again issued relevant Notifications, Circulars and Press Releases extending the due date w.r.t  various direct tax compliances.

 

Updated as on 13th July 2021

 

In the table below, we have summarized the key Notifications and Circulars issued by the CBDT, which has extended the due dates of various direct tax compliances under the Act:

Sr No

Compliance Particulars

Original Due Date

Extended Due Date[1]

1

Objections to Dispute Resolution Panel (DRP) and Assessing officer under section 144C

01 June 2021

31 August 2021 (note 1)

2

Statement of Deduction of Tax for the last quarter of the Financial Year 2020-21

31 May 2021

15 July 2021

3

Certificate of Tax Deducted at Source in Form 16

15 June 2021

31 July 2021

4

Statement of income paid or credited in Form 64D by Investment Fund to its unit holders for Financial Year 2020-2021

15 June 2021

15 July 2021

5

Statement of income paid or credited in Form 64C by Investment Fund to its unit holders for Financial Year 2020-2021

30 June 2021

31 July 2021

6

The application under Section 10(23C), 12AB, 35(1)(i i)/(iia)/(iii) and 80G of the Act in Form No. 10Af Form No.10AB. for registration/ provisional registration/ intimation/ approval/ provisional approval of Trusts/ Institutions/ Research Associations

30 June 2021

31 August 2021

7

Compliances for claiming exemption under provisions contained in sections 54 to 54GB

01 April 2021 to 29 September 2021

01 April 2021 to 30 September 2021

8

Quarterly Statement in Form 15CC to be furnished by Authorized Dealer in respect of foreign remittances made for quarter ended 30th June 2021

15 July 2021

31 July 2021

9

Equalization Levy Statement in Form 1 for Financial Year 2020-21

30 June 2021

31 July 2021

10

Time Limit for processing Equalization Levy return

30 September 2021

11

Annual Statement in Form 3CEK to be furnished under section 9A(5) by Eligible Investment Fund

29 June 2021

31 July 2021

12

Uploading declaration received from recipients in Form No 15G / 15H for quarter ended 30th June 2021

15 July 2021

31 August 2021

13

Exercising of option under section 245M(1) in Form No. 34BB for withdrawing application before Settlement Commission

27 June 2021

31 July 2021

14

Last date of linking of Aadhar with PAN under section 139AA

31 March 2021

30 September 2021

15

Last date of payment under Vivad se Vishwas (without additional amount)

31 August 2021

16

Last date of payment under Vivad se Vishwas (with additional amount)

31 October 2021

17

Time Limit for passing assessment / reassessment order

31 March 2021

30 September 2021

18

Time Limit for passing penalty order

30 September 2021

19

Due date for furnishing Return of Income – Non Audit Case

31 July 2021

30 September 2021

20

Due date for furnishing Tax Audit Report

30 September 2021

31 October 2021

21

Due date for furnishing Transfer Pricing Audit

31 October 2021

30 November 2021

22

Due date for furnishing Return of Income – Audit case

31 October 2021

30 November 2021

23

Due date for furnishing Return of Income where Transfer Pricing is applicable

30 November 2021

31 December 2021

24

Belated / Revised return for Assessment Year 2021-22

31 December 2021

31 January 2022

Note:

1) If the last date allowed u/s. 144C is later than 31 August 2021 then such a later date shall prevail.

 

References:

[1] Notification No 74/2021 & 75/2021 and Circular No 9/2021 dated 20 May 2021 and 12/2021 dated 25 June 2021

Image Credits: Photo by Nataliya Vaitkevich from Pexels

We have summarized the key notifications and circulars issued by the CBDT, extending the due dates of various direct tax compliances under the Act.

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Tax Alert: New Rules for Determining Taxability on Reconstitution of Firms

The Central Board of Direct Taxes (CBDT), vide notification[1] dated 2nd July 2021, has inserted a new sub-rule 5 under Rule 8AA of the Income-tax Rules, 1962 (Rules) which deals with the characterisation of capital gains under section 45(4) of the Act. The CBDT has also notified Rule 8AB, which deals with the attribution of income taxable under section 45(4) of the Act to the capital assets remaining with the specified entity. Additionally, the CBDT, vide circular[2] dated 2nd July 2021, has also issued guidelines for practical application of provisions under section 9B and section 45(4) of the Act.
Background
Finance Act, 2021 had inserted a new section 9B under the Income-tax Act, 1961 (Act) which provides that where a specified person[3] receives any capital asset or stock in trade or both from a specified entity [4] on dissolution or reconstitution of such specified entity, then such specified entity shall be deemed to have transferred such capital asset or stock in trade, or both, in the year in which such capital asset or stock in trade or both are received by the specified person and shall be chargeable to tax as income of the specified entity in that year, under the head “Profits and gains of business or profession” or under the head “Capital gains”, as the case may be. It is also provided that fair market value (FMV) of such capital asset or stock in trade, shall be deemed to be the full value of consideration as a result of such deemed transfer. Further, Finance Act, 2021 had also substituted the provisions of section 45(4) of the Act, which now provides that where a specified person receives any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from such receipt by the specified person shall be chargeable to tax as income of the specified entity under the head “Capital gains” in that year. The amount chargeable to tax under section 45(4) of the Act shall be calculated as per the below-mentioned formula. A = B + C – D where, A = Income chargeable to tax under section 45(4) of the Act B = Value of any money received by the specified person C = Amount of FMV of the capital asset received by the specified person D = Amount of balance in the capital account [represented in any manner (excluding increase due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset)] of the specified person in the books of account of the specified entity at the time of reconstitution. It is also clarified that the provisions of section 45(4) shall operate in addition to the provisions of section 9B and accordingly the taxation under these provisions need to be worked out independently. The Finance Act, 2021 has also inserted a new clause (iii) under section 48 of the Act (deduction from the full value of consideration) which provides that the amount of income chargeable to tax under section 45(4) which is attributable to the capital asset being transferred by the specified entity shall be calculated in the prescribed manner. It may be noted that the above-mentioned provisions are applicable w.r.e.f 1 April 2021 i.e. from the tax year 2020-21 onwards.
Notification/Circular
The Central Board of Direct Taxes (CBDT), vide notification[1] dated 2nd July 2021, has inserted a new sub-rule 5 under Rule 8AA of the Income-tax Rules, 1962 (Rules) which deals with the characterisation of capital gains under section 45(4) of the Act. The CBDT has also notified Rule 8AB, which deals with the attribution of income taxable under section 45(4) of the Act to the capital assets remaining with the specified entity. Additionally, the CBDT, vide circular[2] dated 2nd July 2021, has also issued guidelines for practical application of provisions under section 9B and section 45(4) of the Act. This tax alert summarizes the notification and guidelines issued by the CBDT as under: In order to avoid double taxation of the same amount, the provisions of section 45(4) r.w.s 48(iii) of the Act requires that the amount taxed under section 45(4) of the Act should be attributed to the remaining capital asset(s) of the specified entity, such that when these capital asset(s) get transferred in the future, the amount attributed to such capital asset(s) gets reduced from the full value of consideration.
Capital Gains Charged under Section 45(4)

It is further clarified that the revaluation of an asset or valuation of self-generated asset or goodwill does not entitle the specified entity for deprecation on such increased value. 

The specified entity is required to furnish, electronically, the details of the amount attributed to the capital asset remaining with the specified entity in Form No 5C on or before the due date as prescribed under section 139(1) of the Act.

 
Applicability of Attribution Rule (Rule 8AB) to Capital Assets Forming Part of Block of Assets

 

It was observed that the current provisions provide attribution of capital gains under section 45(4) of the Act only for the purpose of section 48 of the Act. It may be noted that provisions of section 48 apply to capital assets that do not form part of block of assets.

Accordingly, in order to provide clarity and remove the difficulty, the CBDT has stated that the attribution rule i.e. Rule 8AB of the Rules shall also apply in relation to capital assets forming part of the block of assets.

It is further clarified that the amount attributed under Rule 8AB of the Rules shall be reduced from the full value of the consideration received or accruing as a result of the subsequent transfer and accordingly net consideration shall be reduced from the written-down value (WDV) of the block of assets under section 43(6)(c) of the Act or for the purpose of calculating capital gains under section 50 of the Act.

 
Characterization of capital gains under section 45(4) of the Act

 

The CBDT has notified Rule 8AA(5) under the Rules which provides for characterization of the nature of capital gains (i.e. long term or short term) under section 45(4) of the Act. It provides that where the amount of capital gains chargeable under section 45(4) is attributed to short term capital asset, capital asset forming part of a block of assets or capital asset, being self-generated asset or goodwill, then the capital gains under section 45(4) shall be deemed to be from the transfer of short-term capital asset; otherwise, it shall be deemed to be transferred from long term capital asset.

 
Examples under the Guidelines

 

In order to better understand the provisions, few examples have been given in the guidelines:

 
Example 1

 

Facts

There are three equal partners A, B and C in a Firm ‘FR’ having a capital balance of INR 10 lacs each. The details of capital assets held by the firm are as under.

Partner ‘A’ wishes to exit and accordingly the firm decides to give him INR 11 lacs of money and Land ‘U’ to settle his capital balance.

 

Tax Implications

A. Under section 9B of the Act

It shall be deemed that the Firm ‘FR’ has transferred the Land ‘U’ to Partner ‘A’ and accordingly an amount of INR 35 lakhs (50 – 15) shall be chargeable to tax in the hands of ‘FR’ under the head capital gains as long-term capital gains and a tax liability of INR 7 lakhs (assuming no surcharge or cess) shall be payable.

For Partner ‘A’, the cost of acquisition Land ‘U’ would thus be INR 50 lakhs.

B. Accounting in the books of Firm ‘FR’

The net book profit after tax of INR 33 lakhs (computed as amount of capital gains without indexation INR 40 lakhs less tax of INR 7 lakhs) shall be credited to each Partner’s capital account i.e. INR 11 lakhs each.

Pursuant to the above, the capital balance of Partner ‘A’ would increase to INR 21 lakhs (10+11).

C. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per the afore-mentioned formula.

Capital Gains under Section 45(4)

The capital gains of INR 40 lakhs shall be chargeable to tax in the hands of Firm ‘FR’ in addition to INR 35 lakhs chargeable under section 9B of the Act.

D. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Characterization of capital gains under section 45(4) of the Act

Subsequently, when the Land ‘S’ or Land ‘T’ would be transferred by the Firm ‘FR’, the amount of attribution would get reduced from the full value of consideration as per the provisions of section 48(iii) of the Act.

E. Characterization of capital gains

Since the amount of INR 40 lakhs charged to tax under section 45(4) of the Act has been attributed to Land ‘S’ and Land ‘T’, being long term capital assets, such amount shall be chargeable as long term capital gains as per Rule 8AA(5) of the Rules.

 

Example 2

 

Facts

The facts of Example 2 are the same as in Example 1 with a modification that the Firm ‘FR’ sells the Land ‘U’ at FMV of INR 50 lakhs to an outsider and on the exit of Partner ‘A’, the Firm decides to give him INR 61 lakhs to settle his capital balance.

 

Tax Implications

A. Under section 9B and section 45 of the Act

Since neither ‘capital asset’ nor ‘stock in trade’ have been distributed to Partner ‘A’, the provisions of section 9B of the Act do not get triggered. However, the Firm would be liable to normal capital gains tax on the sale of Land ‘U’. Accordingly, an amount of INR 35 lakhs (50 – 15) shall be chargeable to tax in the hands of ‘FR’ under the head capital gains as long-term capital gains and tax liability of INR 7 lakhs (assuming no surcharge or cess) shall be payable.

B. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per the afore-mentioned formula.

Characterization of capital gains under section 45(4) of the Act

The capital gains of INR 40 lakhs shall be chargeable to tax in the hands of Firm ‘FR’ under section 45(4) of the Act.

C. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Characterization of capital gains under section 45(4) of the Act

Subsequently, when the Land ‘S’ or Land ‘T’ would be transferred by the Firm ‘FR’, the amount of attribution would get reduced from full value of consideration as per the provisions of section 48(iii) of the Act.

D. Characterization of capital gains

Since the amount of INR 40 lakhs charged to tax under section 45(4) of the Act has been attributed to Land ‘S’ and Land ‘T’, being long term capital assets, such amount shall be chargeable as long term capital gains as per Rule 8AA(5) of the Rules.

In effect, the final result in both Example 1 and 2 would be same due to operation of section 9B of the Act.

 

Example 3

 

Facts

There are three equal partners A, B and C in a Firm ‘FR’ having capital balance of INR 100 lacs each. The details of capital assets held by the firm are as under.

Characterization of capital gains under section 45(4) of the Act

Partner ‘A’ wishes to exit and accordingly the firm decides to give him INR 75 lacs in money and Land ‘S’ to settle his capital balance.

 

Tax Implications

A. Under section 9B of the Act

It shall be deemed that the Firm ‘FR’ has transferred the Land ‘S’ to Partner ‘A’. However, since the full value of consideration is equal to indexed cost of acquisition, there would be no capital gain tax in the hands of the Firm.

For Partner ‘A’, the cost of acquisition would be INR 45 lakhs.

B. Accounting in the books of Firm ‘FR’

The net book profit after tax of INR 15 lakhs (computed as amount of capital gains without indexation) shall be credited to each Partners capital account i.e. INR 5 lakhs each.

Pursuant to above, the capital balance of Partner ‘A’ would increase to INR 105 lakhs (100+5).

C. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per afore-mentioned formula.

Characterization of Capital Gain - Circular No. 14 of 2021 - Tax Circular - CBDT

The capital gains of INR 15 lakhs shall be chargeable to tax in the hands of Firm ‘FR’. 

D. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

d) Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Subsequently, when the Firm transfers ‘Patent’ or ‘Goodwill’, the amount of attribution would get reduced from full value of consideration as per the provisions of section 48(iii) or section 43(6)(c) or section 50 of the Act, as the case may be.

It may also be noted that for the purpose of computing depreciation under section 32 of the Act, the WDV of the block of asset of which ‘Patent’ is a part, shall remain INR 45 lakhs only and should not be increased to INR 60 Lakhs. Similarly, no depreciation would be allowed on self-generated ‘Goodwill’.

E. Characterization of capital gains

Since the amount of INR 15 lakhs charged to tax under section 45(4) of the Act has been attributed to asset forming block of asset i.e. Patent and to self-generated Goodwill, such amount shall be chargeable as short term capital gains as per Rule 8AA(5) of the Rules.

 
FM Comments

 

The detailed guidelines and notification issued by the CBDT is indeed a welcome move and shall certainly help in addressing various concerns of the taxpayers. However, beyond the 3 specific Examples illustrated, in our view, there would be certain other issues which may require similar deliberation and clarification.

It is pertinent to note that the substituted provisions 45(4) and section 9B of the Act are applicable w.r.e.f. 1 April 2021 (i.e. from tax year 2020-21 onwards), whereas the rules for attribution of income and its characterization have been notified on 2 July 2021. The notification is silent with respect to the date of its applicability.

Generally, such notifications come into force on the date of its publication in the Official Gazette, unless the effective date of its applicability is already provided in the notification itself. CBDT, while notifying Rule 8AA(5) and Rule 8AB, has not provided any ‘effective applicable date’ for the same and accordingly it may be inferred that such Rules are to be made effective from 2 July 2021. Thus, the question which may arise is whether Rule 8AA(5) and Rule 8AB would be applicable to the reconstitution of specified entities that have already been undertaken between 1 April 2020 to 1 July 2021.

It may further be noted that the earlier provisions of section 45(4) provided that the transfer of a capital asset on the dissolution of a firm was made chargeable to tax as the income of the firm. But the distribution of money on dissolution was neither chargeable to tax in the hands of the firm nor in the hands of the recipient Partner.

However, the new provisions of section 45(4) state that distribution of money or capital asset exceeding the balance in the capital account of Partner would now be chargeable to tax under the head “capital gains”. Accordingly, the new provisions create a charge of capital tax on the distribution of money. It may be noted that, generally, ‘money’ or ‘currency’ is not considered as a ‘capital asset’ and accordingly the issue which may arise is that whether the distribution of money could be taxed under the head ‘capital gains’ as there is no transfer of capital asset.

It is also pertinent to note that the attribution rules under Rule 8AB of the Rules would lead to a premature collection of the taxes by the Government, the benefit of which may or may not be obtained by the specified entity.

The specified entity would get the benefit of attribution only when they transfer the remaining capital assets subsequently, which is a contingent event, that may or may not happen. Further, in a case where the excess payment chargeable to tax under section 45(4) of the Act, relates to the valuation of self-generated goodwill, then the entity may not be able to claim the benefit of attribution unless the entity hives off its business undertaking, which is highly unlikely. Another interesting question that would arise is how the specified entity would be eligible to claim the benefit of attribution where remaining capital assets are transferred under tax-neutral arrangements.

Moreover, in a scenario, where the aggregate value of money received by the specified person exceeds the balance in his capital account and it does not relate to the revaluation of any capital assets, then the following issues may arise:

  • Characterization of capital gains as ‘Short-term’ or Long-term’ as no attribution of income would be made by the specified entity to the remaining capital assets under Rule 8AB.
  • Such excess payment may have been made by a specified entity due to other business reasons such as payment for non-compete, etc. Accordingly, the deductibility of such excess amount while computing the taxable income of the specified person, would be a challenge.

Going forward, it would be imperative for specified entities to carefully assess the impact of the above provisions while carrying out any reconstitution activity in order to avoid double taxation.

References: [1] “specified person” means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. [2] “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society). [3] Notification No. 76/2021 [4] Circular No. 14 of 2021 Image Credits: Photo by Nataliya Vaitkevich from Pexels

It is pertinent to note that the substituted provisions 45(4) and section 9B of the Act are applicable w.r.e.f. 1 April 2021 (i.e. from tax year 2020-21 onwards), whereas the rules for attribution of income and its characterization have been notified on 2 July 2021. The notification is silent with respect to the date of its applicability.

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Tax Alert: Clarifications on Section 194Q-TDS on Purchase of Goods

The Central Board of Direct Taxes (CBDT) introduced a new Section 194Q in Finance Act, 2021, which is effective from 01st July 2021, for withholding tax at source on payments made for the purchase of goods.

The provision of Section 194Q states that:

  • Any person, being a Buyer, having a turnover or gross receipts exceeding INR 10 crores during the preceding financial year;
  • While making payment of any sum to any resident (Seller) for purchase of any goods of the value, where the aggregate of such value exceeds INR 50 lakhs in the previous year
  • Shall at the time of credit of such sum to the account of the Seller or at the time of payment, whichever is earlier, deduct an amount equal to 0.1% percent as income tax.

The above provision is not applicable, where:

  • Tax is deductible under any other provision of the Act; or
  • Tax is collectible under the provision of section 206C of the Act, other than transactions covered u/s. 206C(1H) therein.

The CBDT has received several representations with respect to practical challenges that may arise in the implementation of section 194Q. To address the difficulties that may arise, the CBDT has issued Circular No 13[1] of 2021 providing various clarifications regarding section 194Q.

194Q is not applicable in the following situations:

As per the Circular, ambiguity is removed on the applicability of section 194Q in a number of cases. CBDT has clarified that section 194Q is not applicable in the following situations:

  • Transactions relating to securities and commodities, which are carried through recognized stock exchanges, including exchanges that are located in the International Financial Service Centre.
  • Transactions in electricity, renewable energy certificates, or energy certificates traded through registered power exchanges.
  • Payments by non-resident Buyers unless if the purchase of goods is not effectively connected with the Permanent Establishment / fixed place of business of such non-resident in India.
  • On purchase of goods from a Seller whose income is exempt from tax. Similarly, it is clarified that tax collection at source (TCS) provisions under section 206C (1H) of the Act would not be applicable if the Buyer’s income is exempt from tax. However, these exemptions would not be applicable if only part of the Seller’s/Buyer’s income is exempt.
  • In the year of incorporation of the Buyer, the threshold of INR 10 crore would not be satisfied.
  • Transactions, where either payment or credit for the transaction happened before 1st July 2021.
  • TDS would not be applicable on the GST amount if the GST amount is separately indicated in the invoice. However, in the case of advance payments, the TDS under section 194Q will have to be discharged on the entire amount, as it is not possible to identify the GST component.

Calculation related clarifications

  • It has been clarified that for calculating the threshold of INR 50 lakhs in respect of a particular Seller, the transaction for the whole FY 2021-22 shall be considered, starting from 1st April 2021 and not from 1st July 2021.
  • For computing threshold of INR 10 crore in respect of the Buyer, only business turnover or gross receipts from business activities is to be considered. As such, turnover or gross receipts from non-business activities would not require to be taken into consideration.
  • In case of purchase returns, the TDS deducted on such purchases under section 194Q shall need to be adjusted against subsequent purchases from the same Seller, if the money is refunded by the Seller to the Buyer. However, no adjustment will be required in cases where the purchase return is replaced by goods by the Seller.

The interplay between sections 194O, 194Q, and 206C(1H) of the Act:

  • If Section 194O is applicable on any particular transaction, then Section 194Q shall not be applicable;
  • If both section 194O and section 194Q are applicable, then section 194O will prevail;
  • Section 206C(1H) is not applicable if TDS is deductible u/s. 194O or Sec 194Q;
  • If both sections 194O and 206C(1H) are applicable, then 194O shall prevail. Even if TCS is collected by the Seller still tax deduction responsibility of the E-commerce operator under section 194O cannot be condoned; this is because the prescribed tax rate under section 194O is higher than the prescribed tax rate u/s. 206C(1H);
  • If both sections 194Q and 206C(1H) are applicable, then section 194Q shall prevail. However, for ease of business, if TCS under section 206C(1H) has already been collected by the Seller then section 194Q would not be applicable; this is because the prescribed tax rate for deduction under section 194O and the prescribed tax rate for collection under section 206C(1H) are the same.

Comments:

This Circular is an extremely welcome one and has several important clarifications that have been issued by the CBDT before the enactment of the provisions of sections 194Q and 206C(1H). The Circular provides clarity vis-à-vis the scope of the relevant provisions, calculation of thresholds, interplay between overlapping provisions etc.

However, there are still some niggling doubts that prevail, requiring further clarity. For instance, while calculating the threshold of turnover or gross receipts of INR 10 crore w.r.t the Buyer, whether the amount considered should include or exclude the GST component.  

Also, it would help if it is prescribed for the Seller to obtain a “no deduction” declaration from the Buyer w.r.t TDS under section 194Q, in a situation where both sections 194Q and section 206C(1H) are jointly applicable on the same transaction and tax has already been collected and paid under section 206C(1H) by the Seller.

References

[1] Circular No 13 of 2021 dated 30th June 2021 (F No. 370142/26/2021 – TPL

 

Image Credits: Photo by Kelly Sikkema on Unsplash

This Circular is an extremely welcome one and has several important clarifications that have been issued by the CBDT before the enactment of the provisions of sections 194Q and 206C(1H). The Circular provides clarity vis-à-vis the scope of the relevant provisions, calculation of thresholds, interplay between overlapping provisions etc.

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CBDT notifies thresholds for determining ‘Significant Economic Presence’ in India

Background:
The concept of SEP was introduced under Income-tax Act, 1961 (“the Act”) vide Finance Act, 2018, by way of insertion of Explanation 2A to section 9 of the Act, to expand the scope of the term ‘Business Connection’ and includes:
(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed. It was further provided that the transactions or activities shall constitute significant economic presence in India, whether: (i) the agreement for such transactions or activities is entered in India; or (ii) the non-resident has a residence or place of business in India; or (iii) the non-resident renders services in India. The above-mentioned Explanation was inserted primarily for establishing Business Connection in India for Multinational entities carrying out business operations through digital means, without having any physical presence in India. However, its enforceability was deferred time and again as the discussion on this issue was ongoing under G20 – OECD BEPS project.
Read about the implications of the CBDT notification that has prescribed the ‘revenue’ and ‘users’ threshold for the purpose of determining SEP.

References

Image Credits: Photo by Markus Winkler from Pexels

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