Presumptive Taxation Scheme in a new Avatar – Bigger and Better

I. Amendments to section 44AD:

The existing provisions contained in the said section (applicable to individual, HUF or partnership firm) provides that notwithstanding anything to the contrary contained in section 28 to 43C, in the case of an assessee engaged in an eligible business having total turnover or gross receipts not exceeding one crore rupees, a sum equal to 8% of the total turnover or gross receipts, or, as the case may be, a sum higher than the aforesaid sum declared by the assessee in his return of income, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profit and gains of business or profession".

Further, under the existing scheme as per proviso to section44AD(2), where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) of section 44AD subject to the conditions and limits specified in section 40(b).

Subsidy relatable to manufacturing cost would be eligible for Sec. 80-IB relief

Facts

a)  Assessee, eligible for claiming deduction under Section 80-IB, received subsidy, inter-alia, transport subsidy, interest subsidy and power subsidy from the Government.

b)  Assessee claimed deduction under section 80-IB in respect of subsidy so received from the Government by contending that subsidies were directly relatable to cost of manufacture and/or sale of products.

c)  Assessing Officer (AO) disallowed the deduction so claimed by assessee by holding that deduction under section 80-IB is admissible only in respect of profits derived from eligible business. There is a world of difference between the expression “profits derived from” any business, and “profit attributable” to any business.

d)  The contention of the AO was that subsidies that were allowed to assessee had no close and direct nexus with the business of the assessee but had a close and direct nexus with grants from the Government.

Union Budget 2016 – Key Transfer Pricing proposals

The Hon'ble Finance Minister of India presented the third Budget of the Modi Government on 29 February 2016. In the backdrop of significant global slowdown and a need to jumpstart the economy, the Finance Minister's job was to strike an intricate balance between growth, fiscal consolidation and the promise to provide ease of business coupled with a non-adversarial tax regime.

In the recent past, transfer pricing has been a much debated topic in corporate board rooms as well as Government ministries worldwide. The OECDalongwith the G20 and certain other countries have issued the Base Erosion and Profit Shifting (BEPS) Guideline in October 2015 emphasizing on the need to focus on conduct and substance rather than contract and legal form in tax determination. Pricing of intra-group transactions is also a potential trigger for BEPS and expectedly found a crucial place in the OECD BEPS Guidelines.

Clarity on taxation of non-resident ~ few steps to overarching theme of ease of doing business in India

The issue of applicability of certain tax provisions to non-resident has always been a matter of debate and led to controversy in Indian tax administration. Bringing clarity in taxes, reducing litigation is one of the prime objective of the present Government. To achieve the said objective, the Government has taken few steps in the proposed Budget 2016, and has provided clarity on some of the issues faced by the non-resident.

Exemption from requirement of furnishing Permanent Account Number [PAN]

In order to ensure that more people come under the tax net, the Finance (No. 2) Act, 2009 had introduced section 206AA under the Income-taxAct. This section provided for higher withholding tax rate of 20%, if the payee does not provide the PAN, with an exception for non-resident in respect of payment of interest on long-term bonds as referred to in section 194LC. In order to reduce compliance burden for non-resident, it is now proposed that with effect from 1 June 2016, in addition to interest on long-term bonds, the provisions of section 206AA shall not apply to a non-resident in respect of any other payments subject to such conditions as may be prescribed.

This is a welcome relaxation as most of then on-resident tax payers having one time transactions may not have PAN.

Deemed conclusion under section 78a - Welcome provision

The budget, 2016-17 has fulfilled the wishes of the assessees to a great extent and one of the provision that is being welcomed by the assessees is the deemed conclusion of proceedings under section 78A of the Finance Act. This article is an attempt to discuss the amendment made in section 78A of the Finance Act. This section pertains to penalty on any director, manager, secretary or officer who is engaged in the day to day operations and conduct of business and was knowingly party to the contravention made by the organisation. The penalty provisions contained in the section 78A are produced for the sake of convenient reference as follows:-

SECTION 78A. Where a company has committed any of the following contraventions, namely:—

(a) evasion of service tax; or

(b) issuance of invoice, bill or, as the case may be, a challan without provision of taxable service in violation of the rules made under the provisions of this Chapter; or

(c) availment and utilisation of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules made under the provisions of this Chapter; or

Controversy regarding Rate of Service Tax – Whether as per Section 67A or as per Point of Taxation Rules? Union Budget 2016 provides the key.

History of Section 67A:

Section 67A of the Finance Act, 1994 was introduced by The Finance Act, 2012 with effect from 28-05-2012 which is reproduced below:

"67A. The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Explanation.—For the purposes of this section, "rate of exchange" means the rate of exchange determined in accordance with such rules as may be prescribed".

Plain reading of the above provision suggest that the rate of service tax prevailing on the date of provision of service shall be relevant for the purposes of determination of service tax liability. However, such an interpretation would make the Point of Taxation Rules, 2011 redundant for the purposes of determining service tax liability which was the main objective of framing such rules.

How to tax e-commerce businesses'? - Equalisation Levy is an answer

1. Background

Finance Minister has proposed Equalisation Levy (EL) through Finance Bill, 2016, Chapter VIII.

E-commerce companies like Face Book, Google, etc. are growing very fast, earning substantial revenues and some of them are avoiding Income-tax in the Country of Source (COS) as well as Country of Residence (COR). E-commerce business is growing at the fastest rate globally and no Government in the world can allow this business to go tax free.

It is now admitted by OECD and other concerned authorities that under the present rules of international taxation, E-commerce companies can escape taxation. The main reason is that under the existing rules of international taxation, COS can tax a non-resident providing E-commerce services only if the non-resident has a permanent establishment (PE) in the COS. E-commerce companies do not need PE in any COS. They can set up the companies in tax havens and avoid COR tax also. For the last few years, there was strong public criticism – in Britain and other European countries - of these companies escaping taxation. In the light of the American and European financial crisis, G20 countries asked OECD to come out with recommendations for necessary modifications in the existing rules so that E-commerce companies also can be taxed.

Kick to Startup India initiative

The economy of any country depends on quality of its people. Larger the number of employed people, better will be the economy. The importance of promoting entrepreneurs has been recognised by the Indian Government. 'Startup India, Stand up India' is one such campaign for creating a conducive environment for ‪‎startups in India. It aims to boost entrepreneurship, encourage startups with job creation and building an economy driven by technology.

For empowering startups to grow through innovation and technology, the Indian Government announced startup India: Action Plan [plan] which addresses all aspects of the startup eco-system. The plan proposes a 19 point action list which inter-alia includes compliance regime based on self-certification, startup India hub, rollout of mobile app and portal, legal support and fast-tracking patent examination at lower cost, faster exits, funding support through a 'funds of funds' with a corpus of INR 10,000 crore, etc. It also proposes to provide tax exemptions on profits, capital gains, and investment above fair market value subject to fulfillment of certain conditions. The objective to give these exemptions is to promote investments into/growth of startups and address the working capital requirements.

Recently, the Government has issued a notification wherein the term 'startup' has been defined and the procedure for its recognition and obtaining tax benefits has been prescribed.

‘Race against deadline’ for Companies eager to declare interim dividend

The companies suddenly seem to be in a rush to declare interim dividend. The driving reason behind this rush lies in the amendments inserted in the Finance Bill, 2016.

Finance Bill, 2016, seems to have caught hold of the income which was getting taxed at a lower rate. As per the provisions of the Income Tax Act, 1961("IT Act"), dividend distributed by companies, are exempt in the hands of the shareholders by way of exemption under section 10(34) IT Act. Thus, companies are liable to pay distribution tax under section 115-O of the IT Act, at the rate of 17.304% (i.e. basic rate of 15% plus surcharge of 12% and cess of 3%).

Through the FinanceBill 2016, a new section has been introduced (i.e. 115BBDA) to provide that, where the dividend is to be paid to resident individuals, HUFs and Firms then, there would be an additional tax at the rate of 10% in the hands of the investors. This step by the Hon'bl Finance Minister aims at taxing such portion of income which was getting escaped from the ambit of tax, in the hands of those investors, who are subjected to higher tax rate (i.e. 30%).

Our Budget expectations once again come to fruition

Every year ‘Taxmann’ predicts and suggests various substantive and procedural changes to taxation laws based on judicial litigations, prevalent uncertainties and change in the business environment. We met several expectations for Union Budget 2014-15 and 2015-16 which were published in [2014] 47 taxmann.com 297 (Article) and [2015] 61 taxmann.com 143 (Article).

This year also we have released our Budget expectations in [2016] 67 taxmann.com 45 (Article). It is to our credit that many of our expectations came to fruition in the Union Budget 2016 as well.