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.

Move to create employment opportunity

Considering the growth of the economy, the expectation from the Government in the current year's ‪#‎budget was to create more employment opportunities in various sectors such as infrastructure, manufacturing, etc., thereby, resulting in generation of income.

Towards this end, the ‪#‎FinanceBill, 2016,has proposed to incentivize the employers by expanding and liberalising the scope of employment generation incentive available under Section 80JJAA of the Income-tax Act, 1961 ('the Act').

Prior to the proposed amendment, benefit under Section 80JJAA of the Act was available only to employers engaged in the manufacture of goods, subject to the fulfilment of specified conditions such as new regular workmen employed during the previous year in excess of 50 workmen for an existing factory, increase in the number of regular workmen must be by atleast 10% of the existing number of workmen as on the last day of the preceding year.

There has been litigation in the recent past on whether the deduction would be available only to manufacturing sector or would other sectors also be eligible for the same There has been a Tribunal decision wherein, it has been held that even an IT and ITeS Company would be eligible to claim deduction under Section 80JJAA of the Act.

Addressing the above issue and also for generating new employment opportunities, the Finance Minister has proposed to amend the eligibility criteria for deduction under Section 80JJAA of the Act, thereby widening the scope to include all assessees liable to tax audit and not only those engaged in the manufacturing activity.

Click here to Know More at http://bit.ly/1RBpifu

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 120 (Article) and [2015] 61 taxmann.com 143 (Article).

This year also we have released our #Budgetexpectations 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.

The following is a comparative study of the changes suggested by us viz-a-viz changes proposed in the Finance Bill, 2016:

Expectations from Budget 2016-17

1.  (a) Dividend income and share in profit of a firm should not be treated as exempt income for Section 14A disallowance as these incomes always suffer economic taxation.(b) Section 14A disallowance should not exceed amount of total expenditure claimed under any provision of the Act.
2. As per section 206AA, where the deductee does not furnish the PAN, tax shall be deducted at source at higher rates. Such provision is also applicable to non-residents.

Impact of Budget on Individual taxpayers

The Finance Minister, Mr. Arun Jaitely on February 29, 2016 presented his 3rd Union Budget in the Parliament. Various changes have been proposed in the income-tax provisions which would impact the taxable income of an individual. The key direct tax proposals made for an Individual are as under:

1.  Rate of surcharge shall be increased to 15% from 12%, if total income of an individual exceeds Rs. 1 crore.
2.  Relief under Section 87A is proposed to be raised from Rs. 2,000 to Rs. 5,000 if total income of a resident individual does not exceed Rs. 5, 00,000.
3. Dividend income is exempt under section 10(34). However, the Finance Bill proposes an additional tax at the rate of 10% on gross amount of dividend income received from domestic company, if it exceeds Rs. 10 lakhs per annum.
4.  Additional deduction up to Rs. 50,000 is proposed under section 80EE in respect of interest on housing loan to the first time individual buyers of a residential house property.
5.  Maximum deduction under section 80GG for individuals paying house rent but not receiving HRA shall be increased from Rs 24,000 to Rs. 60,000 per annum.
6.  Time-limit to acquire or construct house property to claim deduction of interest on housing loan under section 24(b) has been proposed to be increased from 3 years to 5 years.
7.  A new Section 54EE is proposed to provide exemption up to Rs. 50 lakhs for long-term capital gains invested in units of funds set-up by Government to promote start-ups.
8. Filing of return is now mandatory, even if entire income is exempt from tax under Section 10(38). However, in such case total income should exceed maximum exemption limit without giving effect to the provisions of Section 10(38).
9.  Currently, belated return can be filed at any time before the expiry of 1 year from the end of the relevant Assessment Year. Now, it is proposed that belated return cannot be filed after expiry of relevant Assessment Year.

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Dividend income no longer a sweet exempt pie!!

Finance Act, 1997 bought about a radical change in the system of taxing distribution of dividends by inserting section 115-O of the Income-tax Act, 1961 ('Act'). The tax on dividend was over and above the taxes paid by the company on its profits. This amendment was often criticized as it amounted to double taxation in the hands of the company and again in the hands of shareholders.

Dividend distribution tax ('DDT') was abolished in the year 2002 and the budget for the financial year 2002-2003 proposed the removal of DDT by bringing back the regime of dividends being taxed in the hands of the shareholders/ recipients.

However, in line with the view that it is easier to collect tax at a single point i.e. from the company rather than individual shareholders, the Finance Act, 2003 re-introduced section 115-O of the Act and taxed the amounts so declared, distributed or paid by way of dividend in the hands of the company. Consequently, deduction under section 80L (available to individuals) was discontinued. Also, dividend liable to DDT under section 115-O of the Act was exempted from tax in the hands of shareholders pursuant to section 10(34) of the Act.

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FinMin issues clarifications on excise duty imposed on jewellery

In the Union Budget 2016, basic excise duty of 1% is being imposed on Articles of jewellery (excluding silver jewellery). This will have major impact on individuals as well as Goldsmiths. The excise duty is levied with effect from March 1, 2016. Now, Ministry of Finance issues clarifications to remove doubts and uncertainty on such levy. The Key clarifications are given here under:

1) Articles of silver jewellery are exempt from excise duty.

2) Job workers (manufacturing jewellery for principal manufacturers) are not required to take excise registration and pay excise duty.

3) SSI exemption limit of Rs 6 crore is available to manufacturers of jewellery along with higher eligibility limit of Rs. 12 crore.

Judicial Rulings that prompted amendments by the Finance Bill 2016

The Hon’ble Finance Minister, Arun Jaitley had presented the Union Budget 2016, on 29 February 2016. The Finance Bill, 2016 had proposed certain changes consisting of substantive and procedural changes to reduce the litigation and to bring clarity in the Income-tax Act. There were many judicial rulings that spurred amendments by the Finance Bill, 2016.

Click here to view list of such judicial rulings