Direct tax proposals in the finance bill, 2012—an overview
S. Rajaratnam
Direct tax proposals in the Finance Bill, 2012, has as many as 108 amendments with numerous proposals, good, bad and indifferent.
Good amendments
There are quite a few amendments, which are good.
Personal taxation : There has been a increase of basic exemption limit from Rs. 1.8 lakhs to 2 lakhs and the incomes falling between Rs. 8 lakhs and 10 lakhs will fall in the revised slab taxable at 20 per cent. as against 30 per cent. before.
There is a welcome relief for deduction of interest income up to Rs. 10,000 from savings bank account, postal savings and interest from co-operative institutions proposed under section 80TTA. There is a marginal additional relief of Rs. 5,000 for health check-up, under section 80D.
A worthwhile relief is one under section 80C extending eligibility for insurance policies, where the premium does not exceed 10 per cent. of the maturity amount as against the present limit of 20 per cent., so as to benefit a larger number of policy holders in the upper age bracket, who were so far not able to avail of the same. This class of policies, now brought under section 80C, will also avail of the benefit of exemption from tax on the maturity amount under section 10(10D).
Gift to and from Hindu undivided families (HUF) or its members will now be covered by the exemption under section 56(2)(vii) as from relatives, removing the longstanding lacuna in the definition of "relative" in not covering Hindu undivided family.
A more significant concession is for those individuals and Hindu undivided families with an income below Rs. 10 lakhs, who will be entitled to deduction from their income at 50 per cent. of investments in equities up to Rs. 50,000 in the proposed Rajiv Gandhi Equity Savings Scheme, subject only to a lock-in period of three years for such investment.
As a matter of concession in the procedural law, no advance tax is payable by senior citizens with no business or professional income up to Rs. 5 lakhs.
Capital gains : There is extension of benefit hitherto available for individuals for reinvestment in agricultural lands out of taxable sale proceeds of agricultural lands, under section 54B to Hindu undivided family. There is a rather curious relief proposed under the new section 54GB for reinvestment in companies in SME sector from proceeds of sale of residential property. If it were to be a significant relief, the sale should not be confined to residential property but should cover sale of any capital asset.
Tax deducted at source : The most significant amendment is one which statutorily recognises the law laid down by the Supreme Court in Hindustan Coca Cola Beverage P. Ltd. v. CIT [2007] 293 ITR 226 (SC), which spares liability for tax failed to be deducted, where it is required, if the tax is directly paid by the deductee. If such deductee files a return, there can be no liability under section 201. A more welcome outcome of the same is the consequential recognition by an amendment to section 40(a)(ia) that there would no longer be any disallowance of payment—a reform in law long overdue.
There will be an increase in limit for tax deduction for interest on debentures from Rs. 2,500 to Rs. 5,000 and for compensation for compulsory acquisition from Rs. 1 lakh to Rs. 2 lakhs. There is also a reduction in tax rates in respect of interest in offshore borrowings in specified businesses like power and fertilisers from 10 per cent. to 5 per cent. These are welcome amendments as regards the TDS provisions.
Securities transaction tax (STT) : STT is proposed to be reduced from 0.125 per cent. to 0.1 per cent.
Special deductions : Section 35AD will now be available for three more businesses ; freight stations, bee keeping and storage of sugar. The day for starting business under existing concessions, which are lapsing by March 31, 2012, would get extended by another year in respect of business in cold-chain facility, warehousing in agricultural produce, 100-bedded hospitals, affordable housing and fertilizers. Deduction under section 80-IA(4)(iv) for power projects will also similarly get extended by another year.
Weighted deduction at 200 per cent. will be available for scientific research expenditure and 150 per cent. for expenditure on agri-extension services and on skill-development expenses.
Presumptive tax limit under section 44AD is enhanced from Rs. 60 lakhs to Rs. 1 crore for businesses. Tax audit limit under section 44AB has also been raised not only for business from Rs. 60 lakhs to Rs. 1 crore but also for professions from Rs. 15 lakhs to Rs. 25 lakhs.
Bad amendments
The amendments, which may be considered as bad because of imposition of tax, are in equally large number.
International transactions—Vodafone’s case : Amendments which can be considered to be particularly bad are those which seek to unsettle the understanding of law relating to international taxation in almost all the countries with a view to nullify the decision of the Supreme Court in Vodafone International Holdings B.V. v. Union of India [2012] 341 ITR 1 (SC). Amendments starting from the definition of "capital asset" under section 2(14), "transfer" under section 2(47), the deeming "look through" provisions in Explanations under section 9(1)(i), deeming of agency for non-resident and the extension of time limit for action against such agent from two to six years under section 149, the stipulation that tax residency certificate will not be conclusive, are some of the many amendments, which are draconian in character and are likely to be abused by the Assessing Officers in inferring liability where there is none.
These provisions will create greater uncertainty in cross-border transactions in seeking to impose liability for an asset not located in India and not the subject-matter of transfer in India in respect of a transaction between persons, who are both non-residents. The amendments will cumulatively deem liability in India because of the location of the underlying assets in India. A comparison is sought to be made as between immovable property located in India, the income from which—whether rental or capital gains—would always be taxable. But it overlooks that if the the same property, is held by a company, in taxing its income, the transfer of shares alone would be liable to tax and not as transfer of immovable property.
The more regrettable aspect of this amendment is that it is being made retrospectively from April 1, 1962, which is bereft of any sense in the light of the longer time limit of six years or even the proposed extended time limit of 16 years for assets located abroad but with liability in India. Even the practical aspect as to how the information as regards such transactions would be available in a manner actionable in India have been overlooked. Limitations on extra-territorial jurisdiction under the Constitution do not appear to have been taken into consideration in these amendments, which appear to be knee-jerk reactions to the adverse decision in Vodafone’s case, which has merely reiterated the settled law.
Sale of software : Amendments to section 9(1)(ii) by insertion of Explanations would seek to rope in software sale by deeming an extended sense to the expression "used". The amendments would now more seek to undo the meaning of "software" hither to understood by the Supreme Court as goods whether "it is conveyed in papers, diskettes, floppy, magnetic tapes or CD roms, whether for one-time use for a particular customer as canned software or uncanned in whatever form, whether it comes as part of the computer or independently, whether it is licensed or unlicensed, branded or unbranded, tangible or intangible, it is a commodity capable of being transmitted, transferred, delivered, stored, processed, etc." as in Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 (SC). This understanding is reiterated in Bharat Sanchar Nigam Ltd. v. Union of India [2006] 282 ITR 273 (SC) and Sprint RPG India Ltd. v. Commissioner of Customs [2000] 2 SCC 486 in cases relating to indirect taxes. It seeks to nullify the income-tax decisions, more particularly the decision in Director of Income-tax v. Ericsson A. B. New Delhi [2011] 16 Taxmann.com 371 (Del), so as to bring the sale consideration of a copyrighted product as payment for use of copyright. The amendments to section 9(1)(ii) would now require to be reconciled as between the inference drawn for VAT, Central excise and Customs law.
GAAR : Another fallout of Vodafone’s case is the hasty incorporation of General Anti Avoidance Rule (GAAR), vide the proposed sections 95 to 102 under a newly introduced Chapter X-A read with section 144BA providing for the inference of impermissible avoidance arrangement with the Assessing Officer recognizing the same with protection for the assessee by way of previous approval of the Commissioner, who will refer the matter to an approving panel by way of further protection with such approving panel manned by three Commissioners, where the Commissioner feels that there is a case for invoking section 95. Vodafone’s case clearly recognised the right of the Revenue to reject any artificial arrangement, when it pointed out that McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) was not overruled by Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), so that the incorporation of GAAR should not make any difference to the pre-existing law. It may, however, send a wrong signal to authorities, who may feel that it is a magic wand giving them power wider than what could be reasonably expected. But then, this amendment, which was proposed in the Direct Taxes Code Bill, 2010, was brought in, so to say, by the recommendation in the concurring judgment for such incorporation in Indian law, when it referred to similar provisions in other laws and the need for one in India. The overriding effect of domestic law recognised by yet another amendment without a corresponding amendment to the Double Tax Avoidance Agreement is an anomaly yet to be resolved.
The pre-occupation with domestic law overlooks the international commitments on the part of India to honour the Double Tax Avoidance Agreements. It is felt that a similar provision known as Limitation of Benefits (LOB) would give freedom to the participant countries to draw inferences with reference to substance of transactions rather than the form. While it is so, the kind of transactions covered in Vodafone’s case would possibly make no difference either because of GAAR or LOB but in the light of anxiety or obsession on the part of the Revenue as to its justification for inference of liability in such matters like underlying assets as covered by Vodafone’s case, one can expect another round of long-drawn litigation as the out come of these provisions. At any rate, if Indian tax laws were to inspire confidence in the international community, it must accord with well-known principles accepted globally. It ought to pave the way for certainty and credibility of our laws abroad.
Restructuring of business : Restructuring of business will be treated as an international transaction under section 92B by yet another amendment, so as to be liable to tax nullifying the view consistently taken by the Authority for Advance Rulings in a number of cases as in Amiantit International Holding Ltd., In re [2010] 322 ITR 678 (AAR) and KSPG Netherlands Holdings B.V., In re [2010] 322 ITR 696 (AAR), where there is no consideration involved in restructuring exercise spread over many countries through many corporate entities, which are recognised as having independent existence. What is sought to be proposed is to pierce the corporate veil. This amendment also is one source of litigation which may be expected, though ultimately liability would have to be decided on the facts of the case since neither GAAR nor LOB cannot possibly justify total disregard of corporate veil.
Extension of transfer pricing rules to domestic transactions aggregating to Rs. 5 crores and more is retrograde step since a review of track record of the application of these rules, even to cross-border transactions, shows that it is not an effective tool for testing reasonableness of pricing in a transaction.
Another interesting, if not equally regrettable, amendment is the insertion of Explanation (e) to section 56(2)(vii) providing for taxation of the excess of premium over what is chargeable with reference to fair market value of the shares as deemed income assessable under other sources. The amendment would appear to be the result of the controversies arising out of criminal cases relating to 2G Spectrum based on alleged transfer of licenses, through the medium of the licensee company issuing shares at a premium to the alleged transferee, though the licence continues in the hands of the same company. In accord with the case for prosecution, a deemed transfer is implied under the new provision on issue of shares at a premium. Excess premium is inferred with reference to the issue price of original contributions made by promoters of licensee companies to the new participants in a manner hitherto considered lawful. Apart from the reasonableness or the justification for the inference of transfer, what is more difficult is the ascertainment of fair market value in respect of a business at a stage of formation or at the initial stage of its business with a vast potential for growth. One can expect another series of litigation in 2G cases irrespective of the outcome of prosecution cases.
Capital gains tax : Section 111A is proposed to be amended enhancing rate of tax on short-term capital gains from 10 per cent. to 15 per cent. as against nil tax for long-term capital gains on transactions on which securities transaction tax is paid.
Extension of Transfer Pricing Rules to domestic transactions : The proposal for extension of transfer pricing rules to domestic transactions overlooks the practical difficulties already encountered in implementing these rules even for cross-border transactions. Though it is limited only to aggregate transactions exceeding Rs. 5 crores, it is an unpractical proposal placing an unnecessary burden on the taxpayers and tax administration.
Minimum Alternate Tax (MAT) : MAT is being made more burdensome by removal of exemption hitherto available for businesses in Special Economic Zones (SEZ). A provision has also been made in respect of amount credited to revaluation reserves but mercifully sought to be made liable only on retirement or disposal of asset/s revalued.
Alternate Minimum Tax (AMT) : Another attempt by which what is given as incentive benefit in one hand is sought to be taken away by the other under the new AMT under section 115JEE for all entities except companies, which are already covered by section 115JB. This provision will cover all those entities, including individuals and Hindu undivided families, with adjusted total income exceeding Rs. 20 lakhs and availing of exemption under section 10AA available for undertakings in SEZ and those claiming deduction under the sections covered by Chapter VI-A saving the only deduction under section 80P relating to co-operative institutions. This will involve exercise for all those claiming exemption or deduction to any significant extent being subjected to the ordeal of computation of not only statutory income but also statutory book profits, an agony thus far for companies now proposed to be extended to other entities placing an equally heavy burden for tax administration.
Charities : Amendments to section 2(15) by the Finance Act, 2008, with effect from the assessment year 2009-10 has thrown up considerable litigation with the amendment itself being questioned on its constitutional validity with the issue having been admitted before the Madras High Court in W. P. Nos. 2012 and 2013 and W. P. Nos. 2035 and 2036, dated January 30, 2012 with issue of notice to the Union of India. Trusts and institutions availing exemption under section 10(23C) are also now sought to be exposed to the amended definition in section 2(15) retrospectively from the assessment year 2009-10, irrespective of the fact, whether the approval under section 10(23C) is continued or is revoked. Both the amendment to section 2(15) and this proposal would require reconsideration.
There are many other amendments which may not be treated as either good or bad.
Matters overlooked
There has been considerable discussion as to the Indian monies illegally held abroad and the considerable extent of black money in India especially in the gold hoard, both accounted and unaccounted. If these are brought into the main stream, funds necessary for infrastructure development and our other needs may be met more easily. The Finance Minister has promised to tackle the foreign money by referring to the number of agreements entered with foreign countries for information regarding Indian monies abroad. Information cannot bring monies unless there is not only a pressure on persons holding such monies but there is also a way shown to them for settling the matter once for all. Considering the fact that assessment jurisdiction does not extend beyond six years, the assets proved to have been lying before such date and continuing till date is beyond such time limit for jurisdiction. Even the extended time limit now proposed for sixteen years may not have application in cases, where such persons have been assessed because what is time barred cannot be revived even by retrospective amendment as decided by the Supreme Court in Govinddas v. ITO [1976] 103 ITR 123 (SC).
Similarly black money or even the accounted gold can be brought to surface by removing the hurdles for making such black money white. There are inbuilt amnesty provisions by waiver of penalty under section 273A as well as reduction of interest under section 119(2A) now delegated to the Chief Commissioners. Publicity for these provisions with or without any added concession should go a long way to enable the Government to implement its assurance of successfully tracking these monies. A similar publicity wrongly described as amnesty in 1985 by Shri V. P. Singh, when he was a Finance Minister, did yield some results. It may yield a larger one in the light of the efforts already taken by the Government, so that it is necessary that Government encourages voluntary compliance rather than tackling tax evasion solely on a number of deeming provisions.
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