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TMI BlogRationalisation Measures- DIRECT TAXESX X X X Extracts X X X X X X X X Extracts X X X X ..... ly and not through the investment fund. The existing provisions of section 194LBB provides that in respect of any income credited or paid by the investment fund to its investor, a tax deduction at source (TDS) shall be made by the investment fund @ 10% of the income. Under section 197 of the Act, facility for certificate for deduction of tax at lower rate or no deduction is available in respect of sections enumerated therein, if the Assessing Officer is satisfied that total income of the recipient justifies issue of such certificate, section 194LBB is currently not included in this provision. It has been represented that the existing TDS regime has created certain difficulties. The non-resident investor is not able to claim benefit of lower or NIL rate of taxation which is available to him under the relevant Double Taxation Avoidance Agreement (DTAA), and deduction of tax @10% is to be undertaken mandatorily even if under DTAA, the income is not taxable in India. There is no facility for any investor to approach the Assessing Officer for seeking certificate for TDS at a lower or NIL rate in respect of deductions made under section 194LBB. In order to rationalise the TDS regime in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecially the banks and financial institutions. Disallowance of expenditure in respect of income received from securitisation trust increases the effective rate of taxation. Further, the non-resident and resident investors are unable to take benefits of their specific tax status. In order to rationalise the tax regime for securitisation trust and its investors, and to provide tax pass through treatment, it is proposed to amend the provisions of the Act to substitute the existing special regime for securitisation trusts by a new regime having the following elements: - (i) The new regime shall apply to securitisation trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitisation of standard assets issued by RBI or being setup by a securitisation company or a reconstruction company in accordance with the SARFAESI Act; (ii) The income of securitisation trust shall continue to be exempt. However, exemption in respect of income of investor from securitisation trust would not be available and any income from securitisation trust would be taxable in the hands of investors; (iii) The incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese three documents (country-by-country report, master file and local file) will require taxpayers to articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess transfer pricing risks. It will facilitate tax administrations to make determinations about where their resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries. The country-by-country report requires multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business; the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNEs to report their total employment, capital, accumulated earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in. The Country-by-Country (CbC) report has to be submitted by parent entity of an international group to the prescribed authority in its country of residence. This report is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs. This information shall be furnished to the prescribed authority on or before the prescribed date; (v) the report shall be furnished in prescribed manner and in the prescribed form and would contain aggregate information in respect of revenue, profit loss before Income-tax, amount of Income-tax paid and accrued, details of capital, accumulated earnings, number of employees, tangible assets other than cash or cash equivalent in respect of each country or territory along with details of each constituent's residential status, nature and detail of main business activity and any other information as may be prescribed. This shall be based on the template provided in the OECD BEPS report on Action Plan 13; (vi) an entity in India belonging to an international group shall be required to furnish CbC report to the prescribed authority if the parent entity of the group is resident ;- (a) in a country with which India does not have an arrangement for exchange of the CbC report; or (b) such country is not exchanging information with India even though there is an agreement; and (c) this fact has been intimated to the entity by the prescribed authority; (vii) If there are more than one ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty of ₹ 500,000/- applies; (xiii)The entity can offer reasonable cause defence for non-levy of penalties mentioned above. The proposed amendment in the Act in respect of maintenance of master file and furnishing it are: - (i) the entities being constituent of an international group shall, in addition to the information related to the international transactions, also maintain such information and document as is prescribed in the rules. The rules shall thereafter prescribe the information and document as mandated for master file under OECD BEPS Action 13 report; (ii) the information and document shall also be furnished to the prescribed authority within such period as may be prescribedand the manner of furnishing may also be provided for in the rules; (iii) for non-furnishing of the information and document to the prescribed authority, a penalty of ₹ 5 lakh shall be leviable. However, reasonable cause defence against levy of penalty shall be available to the entity. As indicated above, the CbC reporting requirement for a reporting year does not apply unless the consolidated revenues of the preceding year of the group, based on consolidated financial statement, exceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of tax, cess, duty or fee, employer contribution to Provident Fund, etc., is allowable as deduction of the previous year in which the liability to pay such sum was incurred (relevant previous year) if the same is actually paid on or before the due date of furnishing of the return of income irrespective of method of accounting followed by a person. With a view to ensure the prompt payment of dues to Railways for use of the Railway assets, it is proposed to amend section 43B so as to expand its scope to include payments made to Indian Railways for use of Railway assets within its ambit. This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years. [Clause 23] Clarification regarding set off losses against deemed undisclosed income Section 115 BBE of the Act, inter-alia provides that the income relating to section 68 or section 69 or section 69A or section 69B or section 69C or section 69D is taxable at the rate of thirty per cent and further provides that no deduction in respect of any expenditure or allowances in relation to income referred to in the said sections shall be allowable. Currently, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are recurring in nature) in relation to not carrying out any profession, within the scope of section 28 of the Act i.e. the charging section of profits and gains of business or profession. Further, it is also proposed to amend the proviso to clarify that receipts for transfer of right to carry on any profession, which are chargeable to tax under the head Capital gains , would not be taxable as profits and gains of business or profession. It is also proposed to amend section 55 so as to provide that the 'cost of acquisition' and 'cost of improvement' for working out Capital gains on capital receipts arising out of transfer of right to carry on any profession shall also be taken as 'nil' These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years. [Clause 12 33] Clarification regarding the definition of the term 'unlisted securities' for the purpose of Section 112 (1) (c) Existing provisions of clause (c) of sub-section (1) of section 112 provide tax rate of ten per cent for long-term capital gain arising from transfer of securities, whether listed or unlisted. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, apply in relation to the assessment year 2016-17 and subsequent years. [Clause 35 69] Amortisation of spectrum fee for purchase of spectrum Under section 32 of the Act, depreciation is allowed in respect of assets including certain intangible assets. Under section 35ABB of the Act, amortisation of license fee in case of telecommunication service is provided. Government has newly introduced spectrum fee for auction of airwaves. There is uncertainty in tax treatment of payments in respect of Spectrum i.e. whether spectrum is an intangible asset and the spectrum fees paid is eligible for depreciation under section 32 of the Act or whether it is in the nature of a 'license to operate telecommunication business' and eligible for deduction under section 35ABB of the Act. In order to provide clarity and avoid any future litigation and controversy, it is proposed to insert a new section 35ABA in the Act to provide for tax treatment of spectrum fee. The section seeks to provide,- (i) any capital expenditure incurred and actually paid by an assessee on the acquisition of any right to use spectrum for tele communication services by paying spectrum fee will be allowed as a deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance commission 2,00,000 2,50,000 194D Commission on sale of lottery tickets 20,000 15,000 194G Commission or brokerage 1,000 15,000 194H Commission or brokerage 5,000 15,000 Table-4 : Revision in rates of deduction of tax at source on various payments mentioned in the relevant sections of the Act: Present Section Heads Existing Rate of TDS (%) Proposed Rate of TDS (%) 194DA Payment in respect of Life Insurance Policy 2% 1% 194EE Payments in respect of NSS Deposits 20% 10% 194D Insurance commission Rate in force (10%) 5% 194G Commission on sale of lottery tickets 10% 5% 194H Commission or brokerage 10% 5% The following provisions which are not in operation are proposed to be omitted as detailed in Table 5. Table 5: Certain non-operational provisions to be omitted Present Section Heads Proposal 194K Income in respect of Units To be omitted w.e.f 01.06.2016 194L Payment of Compensation on acquisition of Capital Asset To be omitted w.e.f 01.06.2016 These amendments will take effect from 1st June, 2016. [Clause 70 to 79] Enabling of Filing of Form 15G/15H for rental payments The provision of sub-section 194-I of the Act, inter alia, provides for tax deduction at source (TDS) for pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther proposed to provide that this provision shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by way of an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, on or before the date of the agreement for the transfer of such immovable property. These amendments are proposed to be made effective from the 1st day of April, 2017 and shall accordingly apply in relation to assessment year 2017-18 and subsequent years. [Clause 30] Rationalization of conversion of a company into Limited Liability Partnership (LLP) Existing provisions of clause (xiiib) of Section 47 provides that conversion of a private limited or unlisted public company into Limited Liability Partnership (LLP) shall not be regarded as transfer, if certain conditions are fulfilled, which, inter alia, include a condition that the company's gross receipts, turnover or total sales in any of the preceding three years did not exceed ₹ 60 lakh. It is proposed to amend the said section so as to provide that, for availing tax-neutral conversion, in addition to the existing conditions, the value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme is chargeable to tax. It is proposed to provide that any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme referred to in Section 80CCD, to the extent it does not exceed forty percent of the total amount payable to him at the time of closure or his opting out of the scheme, shall be exempt from tax. However, the whole amount received by the nominee, on death of the assessee shall be exempt from tax. Under section 17, perquisite includes the amount of any contribution exceeding one lakh rupees to an approved superannuation fund by the employer in the hands of the assessee. Under the Part A of Fourth Schedule to the Income-tax Act contributions made by employer to the credit of an employee participating in a recognised provident fund, which are in excess of twelve percent of the salary of the employee, are liable to tax in the hands of the employee. However, there is no monetary limit for the contribution made by the employer though there is a monetary ceiling for employee's contribution. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 139 provides that if any person, having furnished the return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142 discovers any omission or any wrong statement therein, he may furnish a revised return at any time before one year from the end of the relevant assessment year or completion of assessment, whichever is earlier. Clause (aa) of Explanation to sub-section (9) of the section 139 provides that a return of income shall be regarded as defective unless the self-assessment tax together with interest, if any, payable in accordance with the provisions of section 140A, has been paid on or before the date of furnishing of return. In order to rationalise the time allowed for filing of returns, completion of proceedings, and realization of revenue without undue compliance burden on the taxpayer, and to promote the culture of compliance, it is proposed to amend the above provisions of the Act. It is proposed to amend the sixth proviso to sub-section (1) of the section 139 to include that if a person during the previous year earns income which is exempt under clause (38) of section 10 and income of such person without giving effect to the said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which the income was first assessable. It is desirable that proceedings under the Act are finalised more expeditiously as digitisation of processes within the Department has enhanced its efficiency in handling workload. In order to simplify the provisions of existing section 153 by retaining only those provisions that are relevant to the current provisions of the Act, section 153 is proposed to be substituted with the following changes in time limit from the existing time limits: (i) the period, for completion of assessment under section 143 or section 144 be changed from existing two years to twenty-one months from the end of the assessment year in which the income was first assessable; (ii) the period for completion of assessment under section 147 be changed from existing one year to nine months from the end of the financial year in which the notice under section 148 was served; (iii) the period for completion of fresh assessment in pursuance of an order under section 254 or section 263 or section 264,setting aside or cancelling an assessment be changed from existing one year to nine months from the end of the financial year in which the order under section 254 is received by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equisite action is proposed to be 31.3.2017 or twelve months from the end of the end of the month in which order in case of firm is passed, whichever is later. It is also proposed to make consequential changes in time limit for completion of assessment or reassessment by the Assessing Officer in accordance with the extension of time limit provided to the Transfer Pricing Officer in certain cases by amendment in sub-section (3A) to section 92CA. The provisions of section 153 as they stood immediately before their amendment by the Finance Act, 2016, shall apply to and in relation to any order of assessment, reassessment or recomputation made before the 1st day of June, 2016. The amendment will take effect from 1st day of June, 2016. [Clause 68] Rationalisation of time limit for assessment in search cases It is proposed to amend the time limit for completion of assessments made under section 153A or section 153C cases to bring it in sync with the new time limits provided for other cases. In order to simplify the provisions of existing section 153B by retaining only those provisions that are relevant to the current provisions of the Act, section 153B is proposed to be substituted with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and prescribe the same advance tax schedule for all assessees other than an eligible assessee in respect of eligible business as referred to in section 44AD. The modification in payment schedule will facilitate forecasting of revenue collections during a financial year with greater accuracy. It is further proposed that an eligible assessee in respect of eligible business referred to in section 44AD opting for computation of profits or gains of business on presumptive basis, shall be required to pay advance tax of the whole amount in one instalment on or before the 15th March of the financial year. Consequential amendments are also proposed to be made to section 234C which provides for chargeability of interest for deferment of advance tax to bring it in sync with the amendments proposed in section 211. It is also proposed that interest under section 234C shall not be chargeable in case of an assessee having income under the head Profits and gains of business or profession for the first time, subject to fulfillment of conditions specified therein. These amendments will take effect from 1st day of June, 2016. [Clause 87 89] Payment of interest on refund Section 244A inter alia provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident . Sub-section (2A) of section 253 provides that the Principal Commissioner or Commissioner may, if he objects to any direction issued by the Dispute Resolution Panel (DRP) under sub-section (5) of section 144C in pursuance of which the Assessing Officer has passed an order completing the assessment or reassessment, direct the Assessing Officer to appeal to the Appellate Tribunal against such order . Further, sub-section (3A) of section 253 provides that every appeal under sub-section (2A) shall be filed within sixty days of the date on which the order sought to be appealed against is passed by the Assessing Officer in pursuance of the directions of the DRP under sub-section (5) of section 144C. In line with the decision of the Government to minimise litigation, it is proposed to omit the said sub-sections (2A) and (3A) of section 253 to do away with the filing of appeal by the Assessing Officer against the order of the DRP. Consequent amendments are proposed to be made to sub-section (3A) and (4) of the said provision also. These amendments will take effect from 1st day of June, 2016. It is also proposed to provide that in cases where Department is already in appeal against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson shall be considered to have under reported his income if,- (a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143; (b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished; (c) the income reassessed is greater than the income assessed or reassessed immediately before such re-assessment; (d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or 115JC, as thecase may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143; (e) the amount of deemed total income assessed as per the provisions of section 115JB or 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed; (f) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income. The amount of under-reported income is proposed to be calculated in different scenarios as discussed herein. In a case where return is furnished and assessment is made for the first time the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt, deposit or investment is linked to earlier year is proposed to be provided based on the existing Explanation 2 to sub-section (l) of section 271 (1). It is also proposed that the under-reported income under this section shall not include the following cases: (i) where the assessee offers an explanation and the income-tax authority is satisfied that the explanation is bona fide and all the material facts have been disclosed; (ii) where such under-reported income is determined on the basis of an estimate, if the accounts are correct and complete but the method employed is such that the income cannot properly be deducted therefrom; (iii) where the assessee has, on his own, estimated a lower amount of addition or disallowance on the issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance; (iv) where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X and disclosed all the material facts relating to the transaction; (v) where the undisclosed income is on account of a search operation and penalty is leviable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 % of 12 = 6 50 % of 9 = 4.5 * Considering under-reported income is not on account of misreporting Example 2 . Case is of an individual below 60 years of age and no return of income has been furnished: (Figures in Rs) Total Income assessed under section 143(3) 10,00,000 Under-reported Income 10,00,000-2,50,000* =7,50,000 Tax Payable on under-reported Income 30 % of 7,50,000 = 2,25,000 Penalty Leviable** 50 % of 2,25,000 = 1,12,500 * Being maximum amount not chargeable to tax ** Considering under-reported income is not on account of misreporting Example 3 . Case is of a company liable to tax at the rate of 30 per cent.: (Figures in Rs lakh) Returned total Income (loss) (-)100 Total Income (loss) determined under section 143(1)(a) (-)90 Total Income (loss) assessed under section 143(3) (-)40 Total Income reassessed under section 147 20 Considering that none of the additions or disallowances made in assessment or reassessment as above qualifies under sub-section (6) of section 270A, the penalty would be calculated as under: Assessment under section 143 (3) Re-assessment under section 147 Under-reported Income (-)40 minus (-)90 = 50 20 minus (-)40 = 60 Tax Payable on under-reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for bank guarantee under section 281B Under the existing provisions of section 281B the Assessing Officer may provisionally attach any property of the assessee during the pendency of assessment or reassessment proceedings, for a period of six months with the prior approval of the income- tax authorities specified therein, if he is of the opinion that it is necessary to do so for the purpose of protecting the interests of the revenue. Such attachment of property is extendable to a maximum period of two years or sixty days after the date of assessment order, whichever is later. The Income Tax Simplification Committee (Easwar Committee) has recommended that provisional attachment of property could be substituted by a bank guarantee subject to fulfilment of certain conditions. Having considered this recommendation, it is proposed that the Assessing Officer shall revoke provisional attachment of property made under sub-section (1) of the aforesaid section in a case where the assessee furnishes a bank guarantee from a scheduled bank, for an amount not less than the fair market value of such provisionally attached property or for an amount which is sufficient to protect the interests ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. In view of the fact that there are no extra-judicial or administrative duties or difference in the pay scale attached with the post of Senior Vice-president in the Tribunal, it is proposed to omit the reference of Senior Vice-President . Sub-section (2A) of section 253 provides that the Principal Commissioner or Commissioner may, if he objects to any direction issued by the Dispute Resolution Panel (DRP) under sub-section (5) of section 144C in pursuance of which the Assessing Officer has passed an order completing the assessment or reassessment, direct the Assessing Officer to appeal to the Appellate Tribunal against such order . Further, sub-section (3A) of section 253 provides that every appeal under sub-section (2A) shall be filed within sixty days of the date on which the order sought to be appealed against is passed by the Assessing Officer in pursuance of the directions of the DRP under sub-section (5) of section 144C. In line with the decision of the Government to minimise litigation, it is proposed to omit the said sub-sections (2A) and (3A) of section 253 to do away with the filing of appeal by the Assessing Officer against the order of the DRP. Consequent amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 2017-2018 and subsequent years. [Clause ] Extension of time limit to Transfer Pricing Officer in certain cases As per the existing provisions, the Transfer Pricing Officer (TPO) has to pass his order sixty days prior to the date on which the limitation for making assessment expires. It is noted that at times seeking information from foreign jurisdictions becomes necessary for determination of arm's length price by the TPO and at times proceedings before the TPO may also be stayed by a court order. It is proposed to amend sub-section (3A) of section 92CA to provide that where assessment proceedings are stayed by any court or where a reference for exchange of information has been made by the competent authority, the time available to the Transfer Pricing Officer for making an order after excluding the time for which assessment proceedings were stayed or the time taken for receipt of information, as the case may be, is less than sixty days, then such remaining period shall be extended to sixty days. The amendment will take effect from 1st day of June, 2016. [Clause 46] Assumption of jurisdiction of Assessing Officer The existing sub-section (3) of the section 124, inter- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss is to be computed after making the adjustments on account of any arithmetical error in the return or on account of an incorrect claim, if such incorrect claim is apparent from any information in the return. In order to expeditiously remove the mismatch between the return and the information available with the Department, it is proposed to expand the scope of adjustments that can be made at the time of processing of returns under sub-section (1) of section 143. It is proposed that such adjustments can be made based on the data available with the Department in the form of audit report filed by the assessee, returns of earlier years of the assessee, 26AS statement, Form 16, and Form 16A. However, before making any such adjustments, in the interest of natural justice, an intimation shall be given to the assessee either in writing or through electronic mode requiring him to respond to such adjustments. The response received, if any, will be duly considered before making any adjustment. However, if no response is received within thirty days of issue of such intimation, the processing shall be carried out incorporating the adjustments. These amendments will take effect from the 1st day ..... 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