10 things to know before GST rollout

GST will be rolled out from July 1, 2017 and just before its implementation the Govt. had issued various notifications on GST.

Key takeaways from such notifications are given here under: 

1. There is a requirement to mention HSN code of items in tax invoice under GST. Now the Govt. has given some relief to small assessees with annual turnover uptoRs 1.5 crores. They are not required to mention HSN code in their tax invoice. Taxpayers having turnover in the range of Rs 1.5-5 crore will be required to mention only two digits of HSN code and taxpayers with turnover more than Rs 5 crore will be required to mention four digits of HSN code.

2. Now the Govt. has given exemption from reverse charge in those cases wherein the value of goods or services does not exceed Rs 5000 and such goods or services are received by registered person from the unregistered person.

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GST be made effective from July 1, 2017: Date Notified

Even after the announcement of GST rollout from July 1, 2017 there was doubt on its implementation from said date. Now GST would definitely be implemented from said date as Government has notified date of applicability of the CGST and the IGST Act as July 1, 2017.

Earlier the Govt. had notified two rules, viz, composition and registration under CGST. Now the Govt. has notified remaining rules under CGST Act.

Click here to view Notification No. 9/2017

Click here to view Notification No. 10/2017

High Court absolves Son in cheque bouncing case as it was issued from his father’s account

Facts of the case:

a) In the recent case law, the accused – Son had issued a cheque in respect of loan outstanding against him. The said cheque was issued by the accused towards outstanding amount from his father’s account. However, the same cheque was dishonored for want of sufficient funds in the account.

b) Lender - bank has issued notice to accused for payment of dishonored cheque. As accused - Son failed to pay outstanding amount, the lender - bank filed a complaint before trial court which was dismissed by the magistrate.

c) Being aggrieved at the judgement of trial court, lender- bank preferred an appeal to the Bombay High Court.

The Bombay High Court held as under:

i. If cheque had been issued by the Son from the account of his father and it bounced, then the lender - bank could not file a criminal case against Son, as one of the ingredients of section 138 of the Negotiable Instrument Act for holding one guilty was not satisfied that cheque must have been issued from an account maintained by the accused. Therefore, the case would not fall within the ambit of Section 138 of the Negotiable Instrument Act. [2017] 82 taxmann.com 432 (Bombay)

No denial of sec. 54 relief just because purchase agreement specifies delivery of flat after 3 yrs

Facts:

a) The assessee had shown long-term capital gains from sale of a residential house. She claimed deduction under section 54 on the ground that a part of said gain had been invested in a flat.

b) The AO noted that as per the purchase agreement flat would be delivered to the assessee within a period of 36 months with a grace period of six months from the date of actual start of construction.

c) The AO concluded that the said flat could not be handed over to the assessee by the builder within a period of 3 years from the date of transfer of the original asset and, therefore, denied the exemption claimed under section 54.

d) The assessee submitted that since full/substantial consideration had been paid by her, she was entitled to benefit of deduction on account of the investment in the flat under section 54. The Commissioner (Appeals) upheld the order of AO. The aggrieved assessee filed the instant appeal.

The ITAT held as under:

1) If substantial amount of capital gain has been invested by the assessee for the purpose of purchasing a new house, deduction under section 54 cannot be denied for the reason that construction was not completed within three years or house was not purchased within two years. In the present case the assessee had invested substantial amount for purchasing the new asset and thus she was entitled to claim deduction under section 54.

2) Even otherwise section 54 gives a window period of three years from the date of transfer of original asset, for the construction of a new house and two years for purchasing a new house. Further as per the section the amount utilized for the said purpose along with the amount deposited in a specified bank account for the purpose, before the date of filing of return of income, is treated as cost of construction of the new asset and exemption granted thereof.

3) Thus, clearly, as per section 54(2), exemption to the extent of amount utilized for construction is to be granted in the year of transfer of asset and the condition of completion of construction is to be looked into only after the window period provided by the Act of three years expires.

4) Therefore, impugned order rejecting assessee's claim for deduction in year of filing return itself, was to be set aside. - [2017] 82 taxmann.com 306 (Chandigarh - Trib.) 

Sec. 14A disallowance not to be considered while computing book profits under MAT: ITAT special bench

The issue before the special bench of ITAT was:-

“Whether the expenditure incurred to earn exempt income computed u/s 14A could not be added while computing book profit u/s 115JB of the Act” ITAT special bench held in favour of assessee as under:

1) Applicability of provisions of sec. 14A is confined to computation of tax liability under the five heads of income enumerated in sec. 14 under normal provisions contained in Chapter IV of the Act. The said section 14A cannot be extended and read into section 115JB, falling under Chapter XI1-B of the Act.

2) Further, the scope of section 14A and section 115JB is entirely different. Under section 14A, disallowance is made of expenditure in relation to the earning of income not forming part of the total income. Thus, it takes within its sweep both direct and indirect expenditure having proximate connection with earning of exempt income.

3) However, under clause (f) of the Explanation 1 to section 115JB, only those expenditures debited to the profit and loss amount, which are relatable to earning of income exempt u/s 10 (excluding section 10(38) or section 11 or section 12 are added back while computing adjusted book profit. Thus, only direct expenditure associated with the earning of said income would be added back.

4) Therefore, there could not be any room for making adjustment in accordance with any other provision of the Act, except to the extent specified under the Explanation. Therefore, computation under clause (f) of the Explanation 1 to section 115JB(2) was to be made without resorting to the computation as contemplated u/s 14A, read with Rule 8D of the Income-tax Rules, 1962. - [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB)

No denial of sec. 54 relief just because construction wasn't completed in 3 years

Facts:

a) The assessee sold his property and invested capital gains amount in purchase of new property. Capital gain was appropriated within a period of 3 years from the sale of the property.

b) The possession of the new property was handed over to the assessee after 3 years when the construction of the new property got completed.

c) Assessing Officer (AO) disallowed capital gain exemption as the construction of residential property was not completed within 3 years from the transfer of residential capital asset

d) On appeal, CIT (Appeals) upheld the disallowance. Aggrieved-assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1) It was held in by the Karnataka High Court in the case of CIT v. Smt. B.S. Shantha kumari [2015] 60 taxmann.com 74/233 Taxman 347 that completion of construction within three years was necessary and not mandatory to claim section 54 exemption.

2) In the instant case, assessee had already appropriated the capital gains for the purpose of construction of residential unit. However, construction was not completed within the stipulated period. Therefore, liberal interpretation was to be considered while granting exemption under section 54, as it was beneficial provision.

3) Since assessee over and above satisfied the conditions laid down by section 54 and demonstrated his intention to invest the capital gains in residential house he was entitled to exemption under section 54. - [2017] 82 taxmann.com 284 (Chennai - Trib.)

Timing of India Withholding Tax on Royalty/Technical Service Fees for overseas entities– the Dichotomy continues?

Withholding Tax in India is often perceived to be a challenging matter by many overseas entities having operations/activities in India. This may be on account of various reasons like lock up of funds in India (on account of taxes withheld) where a position of non taxability of income is adopted, mismatch between the year in which taxes are withheld by the Indian payer of income vs. the year in which the income is offered to tax in India, challenges with claiming credit for taxes withheld in India in the home country. 

One of the issues on which there has been some judicial debate is the point of time when withholding tax obligation triggers for an Indian payer of income in relation to a Royalty/Technical Service fee ('Service fee') payment proposed to be made to an overseas entity.

So as to set a context to the issue which is discussed in this article, to start with, it may be relevant to make a quick note of the fact that Sections 5 and 9 of the Income-tax Act, 1961 ('IT Act') are provisions dealing with scope of incomes chargeable to tax in India in principle, whereas, Section 145 of the IT Act governs the timing of taxation of the incomes in India (i.e. based on the cash or mercantile system of accounting regularly followed). Section 195 of the IT Act deals with withholding tax obligations in relation to payments proposed to be made to non-residents which are chargeable to tax in India.

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IFRS Exposure draft: Sales proceeds during testing of fixed asset to be recognised as other income

The International Accounting Standards Board (IASB) has proposed narrow-scope amendments to International Accounting Standards (IAS) 16 Property, Plant and Equipment. IAS 16 provides principles for recognition and measurement (initial & subsequent) of items of Property, Plant and Equipment (PPE) as assets. The proposed amendments include modification to the definition of directly attributable costs as cited in the para 17 of IAS 16.

As per clause (e) of para 17, directly attributable costs include costs of functionality testing of assets after deducting the net sale proceeds from items produced while bringing the asset to the location & condition necessary for it to be capable of operating in the manner as intended by the management.

Now, IASB has proposed amendments to the above component of directly attributable cost. As per the amendment, the net sale proceeds from such items produced should not be deducted from the costs of functionality testing of assets. To establish principle for treatment of such sale proceeds, a new para 20A has been proposed to be added to IAS 16.

According to the proposed new para 20A, the proceeds from selling such items produced while bringing the asset to that location & condition and production costs of such items should be recognised to profit or loss as per respective IAS/IFRS (International Financial Reporting Standards).

The above amendments have been proposed to reduce diversity in application of para 17 of IAS 16. These amendments would be applied both prospectively and retrospectively. An entity shall apply these amendments retrospectively only to the items property, plant & equipment brought to use as intended by the management only in the year in which the entity first applies these amendments. The Exposure Draft of proposed amendments would be open for public comment until October 19, 2017.

Not Really a Seamless Credit Mechanism – The Story of ‘Blocked Credits’

A seamless credit flow is the bedrock of an efficacious GST mechanism whereby cascading effect of taxes is eliminated through a chain of tax credits allowed for set off against output tax liability at each stage. With the introduction of GST regime in India, expectations were high on seamless availability of Input Tax Credits ('ITCs) on various business expenses such as employee insurance, business travel, rent-a-cab etc., that are

currently 'blocked' under the 'existing law'. Strangely enough, expectations were belied as these ITCs continue to be 'blocked' under the imminent GST regime. In brief, the taxpayer cannot avail ITCs on following important categories of expenditure under the GST regime: 

1) Motor vehicles (except for a few taxpayers like transporters, vehicle dealers etc);

2) Food & beverages and outdoor catering etc;

3) Health treatment, membership of fitness club etc;

4) Taxi/cab service, Insurance (except when required by law); and

5) Works contract services;

A perusal of the above list reveals that the situation has remained unchanged or become stricter as regards 'blocked credits' under the GST Regime.

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Final notification on Sec. 10(38) brings clarity

Under the existing provisions of the Section 10(38) of the Income-tax Act ('the Act') income arising from a transfer of long-term capital asset, being equity share of a company, is exempt from tax if the sale has been undertaken on or after 1st October, 2004 and is chargeable to Securities Transactions Tax (STT).

It has been noticed that such exemption is being misused by declaring unaccounted income as exempt long-term capital gains (LTCG) after entering into sham transactions. With a view to prevent this abuse, Section 10(38) has been amended to provide that exemption shall be available only if the acquisition of share is chargeable to STT. Further, powers have been given to the CBDT to notify transactions which would be eligible for capital gains exemption even if no STT was paid on purchase of such shares. The CBDT then issued the draft notification and brought out the negative list of transactions on which such exemption would not be available. Now the CBDT has issued the final notification considering the representations of various stakeholders for entitlement to the capital gain exemption in genuine cases.

The final notification is similar to the draft notification in terms of prescribing negative list of transaction. However, relaxation has been given in interest of exemption in genuine cases.

Following three type of transactions will not enjoy capital gain exemption under Section 10(38):

a) Acquisition of listed equity share through a preferential allotment in a company whose equity shares are not frequently traded in stock exchange.

b) Acquisition of listed equity shares not through a recognized stock exchange.

c) Acquisition of equity shares of a company during the period of its delisting.

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