DIRECT TAX AMENDMENT BATCH FOR MAY 14 & NOV 14 ATTEMPT -BY CA Varun Jakkinapalli TAX RATES FOR ASSESSMENT YEAR

Transcription

1 1 For Individuals DIRECT TAX BATCH FOR MAY 14 & NOV 14 ATTEMPT -BY CA Varun Jakkinapalli TAX RATES FOR ASSESSMENT YEAR Resident senior citizen (who is 60 years or more at any time during the PY but less than 80 years)- Net income range Income-tax rates Surcharge Education cess Secondary and higher education cess Up to Rs. 2,50,000 Nil Nil Nil Nil Rs. 2,50,000 Rs. 10% of (total income minus Rs. Nil 2% of income-tax 1% of income-tax 5,00,000 2,50,000) [see Note 1] Rs. 5,00,000 Rs. Rs. 25, % of (total Nil 2% of income-tax 1% of income-tax 10,00,000 income minus Rs. 5,00,000) Rs. 10,00,000 Rs. 1,00,00,000 Rs. 1,25, % of (total income minus Rs. 10,00,000) Nil 2% of income-tax 1% of income-tax Above Rs.1,00,00,000 Rs. 28,25, % of (total income minus Rs.1,00,00,000) 10% of income-tax [see Note 2] Resident super senior citizen (who is 80 years or more at any time during the PY) 2% of income-tax and surcharge 1% of income-tax and surcharge Net income range Income-tax rates Surcharge Education cess Secondary and higher education cess Up to Rs. 5,00,000 Nil Nil Nil Nil Rs. 5,00,000 Rs. 20% of (total income minus Rs. Nil 2% of income-tax 1% of income-tax 10,00,000 5,00,000) Rs. 10,00,000 Rs. 1,00,00,000 Rs. 1,00, % of (total income minus Rs. 10,00,000) Nil 2% of income-tax 1% of income-tax Above Rs. 1,00,00,000 Rs. 28,00, % of (total income minus Rs. 1,00,00,000) 10% of income-tax [see Note 2] Other resident individual, any non-resident individual, every HUF/AOP/BOI/AJP 2% of income-tax and surcharge 1% of income-tax and surcharge Net income range Income-tax rates Surcharge Education cess Secondary and higher education cess Up to Rs. 2,00,000 Nil Nil Nil Nil Rs. 2,00,000 Rs. 10% of (total income minus Rs. Nil 2% of income-tax 1% of income-tax 5,00,000 2,00,000) [see Note 1] Rs. 5,00,000 Rs. Rs. 30, % of (total Nil 2% of income-tax 1% of income-tax 10,00,000 income minus Rs. 5,00,000) Rs. 10,00,000 Rs. 1,00,00,000 Rs. 1,30, % of (total income minus Rs. 10,00,000) Nil 2% of income-tax 1% of income-tax Above Rs. 1,00,00,000 Rs. 28,30, % of (total income minus Rs. 1,00,00,000) 10% of income-tax [see Note 2] 2% of income-tax and surcharge 1% of income-tax and surcharge In the case of every co-operative society, (1) where the total income does not exceed Rs. 10, per cent of the total income; (2) where the total income exceeds Rs. 10,000 but does not exceed Rs. 20,000 Rs. 1,000 plus 20 per cent of the amount by which the total income exceeds Rs. 10,000; (3) where the total income exceeds Rs. 20,000 Rs. 3,000 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000. In the case of every firm, On the whole of the total income In the case of every local authority, On the whole of the total income 30 per cent 30 per cent CA VARUN JAKKINAPALLI /

2 2 Notes : (1) Rebate under section 87A - A Resident Individual (whose net income does not exceed Rs. 5,00,000) can avail rebate under section 87A. It is deductible from income-tax before calculating education cess. The amount of rebate is 100 per cent of income-tax or Rs. 2,000, whichever is less. (2) Surcharge - Surcharge is 10 % of income-tax if net income exceeds Rs. 1 crore. It is subject to marginal relief (in the case of a person having a net income of exceeding Rs. 1 crore, the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore). (3) Education cess - It is 2 per cent of income-tax and surcharge. (4) Secondary and higher education cess - It is 1 per cent of income-tax and surcharge. (5) Alternate minimum tax- Tax payable by a non-corporate assessee cannot be less than 18.5% (+SC+EC+SHEC) of "adjusted total income" as per section 115JC In the case of a company, I. In the case of a domestic company 30 per cent of the total income; II. In the case of a company other than a domestic company on so much of the total income as consists of, (a) royalties received from Govt/an Indian concern in pursuance of an agreement between & ; or (b) fees for technical services from Govt / Indian concern in pursuance of an agreement between & , and where such agreement has, in either case, been approved by the Central Government 50 per cent; on the balance, if any, of the total income 40 per cent Note : Surcharge Domestic company (a) In case of a domestic company, whose total income > Rs. 1 crore but is Rs. 10 crore Where the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore, surcharge is payable at the rate of 5% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs. 1 crore should not be more than the amount of income exceeding Rs. 1 crore. (b) In case of a domestic company, whose total income is > Rs.10 crore Where the total income exceeds Rs. 10 crore, surcharge is payable at the rate of 10% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs. 10 crore should not be more than the amount of income exceeding Rs. 10 crore. Foreign company (a) In case of a foreign company, whose total income > Rs. 1 crore but is Rs.10 crore Where the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore, surcharge is payable at the rate of 2% of income-tax computed in accordance with the provisions of paragraph (v)(2) above or section 111A or section 112. Marginal relief is available in case of such companies i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs. 1 crore should not be more than the amount of income exceeding Rs. 1 crore. (b) In case of a foreign company, whose total income is > Rs.10 crore Where the total income exceeds Rs. 10 crore, surcharge is payable at the rate of 5% of income-tax computed in accordance with the provisions of para (v)(2) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs.10 crore should not be more than the amount of income exceeding Rs. 10 crore. CA VARUN JAKKINAPALLI /

3 3 Section 2(1A)(c) has been amended by the Finance Act with effect from assessment year to revise the definition of urban area. Now Urban area means: (A) (B) (iii) any area within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than 10,000, or any area within the distance, measured aerially (shortest aerial distance), not being more than 2 kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than 10,000 but not exceeding 1,00,000; or not being more than 6 kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than 1,00,000 but not exceeding 10,00,000; or not being more than 8 kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than 10,00,000. The expression 'population' shall mean population according to the last preceding census of which the relevant figures have been published before the first day of the previous year. ANALYSIS BY Firstly, Distance from municipality within which agricultural land is to be located for it to be considered as urban land has been changed from uniformly 8 kms to within 8 kms depending on population. Secondly, distance to be measured on straight line aerially as crow flies and not by road method which was used by Courts in various decisions such as (1) CIT v. Lal Singh [2010] 195 Taxman 420 (Punj. & Har.) (2) CIT v. Satinder Pal Singh [2010] 188 Taxman 54 (Punj. & Har.) (3) Laukik Developers v. Dy. CIT [2007] 105 ITD 657 (Mumbai) The amendment overcomes above Court decisions. As per the provisions of Section 10(10D), Any sum received under a life insurance policy is exempt subject to the condition that annual premium paid for such policies does not exceed 10 % (20 % if policy was issued before ) of actual capital sum assured. Section 10(10D) has been amended with effect from whereunder the limit has been increased to 15 per cent for insurance (if policy is issued on or after ) on the life of any person who is, - A person with DISABILITY or a person with severe disability as referred to in section 80U; OR - Suffering from DISEASE or ailment as specified in rule 11DD/section 80DDB. Summary of CHANGING PROVISIONS: Policy on the life of a person with disability or severe disability or on the life of a person suffering from disease or ailment as given in section 80DDB/rule 11DD Policy on the life of any other person - If policy was issued before April 1, 2003 Any % of sum assured Any % of sum assured - If policy was issued on or after April 1, 2003 but before April 1, % of sum assured* 20% of sum assured* - If policy was issued during % of sum assured** 10% of sum assured** - If policy is issued on or after April 1, % of sum assured** 10% of sum assured** *Sum assured does not include any premium agreed to be returned and/or any benefit by way of bonus. **Sum assured means minimum amount assured under the policy without including any premium agreed to be returned and/or any benefit by way of bonus. The amendment only alleviates hardships in respect of policies issued on or after Policies issued between to would still continue to suffer loss of tax benefits if premium exceeds 10% of capital sum assured. Section 10(10D) exempts any sum received under a life insurance policy other than a keyman insurance policy. Explanation 1 to the said clause (10D) defines a keyman insurance policy to mean a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person. CA VARUN JAKKINAPALLI /

4 4 With a view to plug the loophole and check tax avoidance through assignment of Keyman Insurance Policies, section 10(10D) has been amended to provide that a keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a keyman insurance policy. The above amendment will take effect from and will, accordingly, apply in relation to assessment year and subsequent assessments years. ANALYSIS BY LOOPHOLE In CIT v Rajan Nanda [2012] 205 Taxman 138, it was held by the Delhi High Court that once there is assignment of insurance policy by employer-company to employee before maturity, the policy becomes an ordinary insurance policy and maturity proceeds under the policy would be exempt under section 10(10D). Explanatory Memorandum to the Finance Bill, 2013 notes that "policies taken as keyman insurance policy are being assigned to the keyman before its maturity. The keyman pays the remaining premium on the policy and claims the sum received under the policy as exempt on the ground that the policy is no longer a keyman insurance policy. Thus, the exemption under section 10(10D) is being claimed for policies which were originally keyman insurance policies but during the term these were assigned to some other person." New clause (23ED) of section 10 Exemption to Investor Education Fund set up by a depository for protection of beneficial owners Under the provisions of SEBI (Depositories and Participants) Regulations, 1996, as amended in 2012, the depositories are mandatorily required to set up an Investor Protection Fund. Finance Act, 2013 has inserted new clause (23ED) in section 10 of the Act with effect from assessment year , to exempt from income-tax, income any income, by way of contributions received from a depository, of Investor Protection Fund set up in accordance with the regulations made under the SEBI Act and the Depositories Act, by a depository, as the Central Government may, by notification in the Official Gazette, specify in this behalf. Exemption is in respect any income, by way of contributions received from a depository. Amount standing to the credit of the Fund and not charged to tax should not be shared wholly or partly with any depository. If so shared the whole of the amount so shared shall be deemed to be the income of the previous year in which such amount is so shared and shall, accordingly, be chargeable to income-tax. Existing Law: Under section 10(23EA), income by way of contributions from a RSE received by a Investor Protection Fund set up by the RSE is exempt from taxation. Teaser: Is the amendment in-line with the existing provisions? What was the necessity to get the Change? Existing Law: Section 10(23FB) provide that any income of a Venture Capital Company (VCC) or Venture Capital Fund (VCF) from investment in a Venture Capital Undertaking (VCU) shall be exempt from taxation. Section 115U provides that income accruing or arising or received by a person out of investment made in a VCC or VCF shall be taxable in the same manner as if the person had made direct investment in the VCU. These sections provide a tax pass through status (i.e., income is taxable in the hands of investors instead of VCF/VCC) only to the funds which satisfy the investment and other conditions as are provided in SEBI (Venture Capital Fund) Regulations, Further the pass through status is available only in respect of income which arises to the fund from investment in VCU, being a company which satisfies the conditions provided in SEBI (Venture Capital Fund) Regulations, CA VARUN JAKKINAPALLI /

5 5 Need: SEBI (Alternative Investment Funds) Regulations, 2012 (AIF regulations) have replaced the SEBI (Venture Capital Fund) Regulations, 1996 (VCF regulations) from The AIF Regulations now regulate all privately pooled investment vehicles which collect funds from investors for investments in accordance with a predefined investment policy for the benefit of its investors AIF can be a fund established or incorporated in the form of a trust, company, LLP or body corporate. The AIF Regulations cover a much wider ambit of funds and categorize them into broadly three categories: Category I AIF comprises of funds which invest in startup or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable. Category I AIF presently has 4 sub-categories, namely, venture capital funds, SME Funds, social venture funds and infrastructure funds. Investment norms have been prescribed for each of the sub-categories to ensure that the fund allocates substantial majority of its capital to the target focus. Category II AIF is a residual category and covers AIFs for which no specific incentives or concessions are given by the Govt/other regulators. Category II AIF will cover classic private equity funds and debt funds. Such funds do not undertake leverage or borrowing other than to meet day-to-day operational requirements. Category III AIFs are AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Category III AIF will cover hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended. As in the case of Category II AIFs, no specific incentives or concessions are given by the Government/other regulators. Finance Act, 2013 has amended section 10(23FB) 'in order to provide benefit of pass through to similar venture capital funds as are registered under new regulations and subject to same conditions of investment restrictions in the context of investment in a venture capital undertaking'. The Finance Minister in his speech introducing the Finance Bill, 2013 explained the amendments as under: "143. Venture Capital Funds have been allowed pass through status under the Income-tax Act. The relevant regulations of SEBI have been replaced by Alternative Investment Fund Regulations. Hence, I propose to extend, subject to certain conditions, pass through status to category I Alternative Investment Funds registered with SEBI as venture capital funds. Angel Investors who are recognised as category I AIF venture capital funds will also get pass through status." The existing VCFs and VCCs (i.e., which have been registered before ) and are regulated by the VCF regulations, as they stood before repeal by AIF regulations, would continue to avail pass through status as currently available. Amendment: Retrospectively from and will accordingly apply i.r.o AY and subsequent assessment years. Definition of 'venture capital company' substituted with effect from to cover within its scope a company which has been granted a certificate of registration as Venture Capital Fund as a sub-category of Category I Alternative Investment Fund and is regulated under the SEBI (AIF) Regulations, 2012 and which fulfils the following conditions, namely: (iii) it is not listed on a RSE (i.e., Units of a trust set up as AIF or shares of a company set up as AIF, are not listed on a recognised stock exchange) it has invested not less than two-thirds of its investible funds in unlisted equity shares or equity linked instruments of VCUs; and it has not invested in any Associate VCU (i.e a VCU in which its director or a substantial shareholder (being a beneficial owner of equity shares exceeding ten per cent of its equity share capital) holds, either individually or collectively, equity shares in excess of 15% of the paid-up equity share capital of such venture capital undertaking Definition of 'venture capital fund' is substituted with effect from to cover within its scope a company which has been granted a certificate of registration as Venture Capital Fund as a sub-category of Category I Alternative Investment Fund under the AIF Regulations and which fulfils the following conditions, namely: (iii) it has invested not less than two-thirds of its investible funds in unlisted equity shares or equity linked instruments of venture capital undertaking; it has not invested in any Associate VCU (i.e a VCU in which its trustee or the settler holds, either individually or collectively, equity shares in excess of fifteen per cent of the paid-up equity share capital of such venture capital undertaking); and the units, if any, issued by it are not listed in any RSE; Definition of 'venture capital undertaking' is also substituted to cover also within its scope a venture capital undertaking as defined in clause (aa) of sub-regulation (1) of regulation 2 of the Alternative Investment Funds Regulations. CA VARUN JAKKINAPALLI /

6 6 Exemption to foreign company in respect of income from sale of crude oil [Section 10(48)] Finance Act, 2012 inserted new clause (48) in section 10 with retrospective effect from assessment year to provide that any income of a foreign company on account of sale of crude oil will not be included in its total income, provided that the following conditions are fulfilled : (iii) (iv) (v) (vi) (vii) The crude oil is sold to any person in India The income is received in India The income is received in Indian currency The income is pursuant to an agreement / arrangement which is either entered into by the CG or approved by it. The foreign company and the arrangement / agreement have been notified by the CG in this behalf. Such notification is made having regard to the national interest. The foreign company is not engaged in any activity other than receipt of income in India. OBJECTIVE: Extract of the Memorandum explaining the provisions of the Finance Bill, 2012 as follows : "In the national interest, a mechanism has been devised to make payment to certain foreign companies in India in Indian currency for import of crude oil. The current provisions of the Income-tax Act would render such payment taxable in India because payment is being received by these foreign companies in India in Indian currency. This would not be justified when such payment is based on national interest and particularly when no other activity is being carried out in India by these foreign companies except receipt of payment in Indian currency. It is therefore proposed to insert a new clause (48) in section 10 of the Income-tax Act to provide for exemption in respect of any income of a foreign company received in India in Indian currency on account of sale of crude oil to any person in India." The exemption applies only i.r.o sale of crude oil; other products such as natural gas, etc., are not covered by the exemption. A foreign company which is a resident of a country with whom India has entered into a DTAA would ordinarily be taxable in India in respect of its business profits only if it has a PE in India. Hence, receipt of sale proceeds would not trigger taxation in India if the foreign company does not have a PE in India. Hence, in any case such foreign company would not be liable to tax in India and the benefit of exemption under section 10(48) would be effectively relevant only for a company which is not a resident of a country with whom India has entered into a DTAA. Finance Act, 2013 has amended section 10(48) with effect from assessment year to extend the exemption to income from sale of any other goods or rendering of services as may be notified by the Central Government. Exemption to National Finance Holdings Company Ltd. [New clause (49) of section 10] Specified Undertaking of Unit Trust of India (SUUTI) was created vide the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 as the successor of Unit Trust of India (UTI). Exemption from Income-tax was available to SUUTI in respect of its income up to SUUTI has been wound up and is succeeded by a new company wholly owned by the Central Government. It has been incorporated on as National Financial Holdings Company Limited (NFHCL). In order to provide exemption on the lines of SUUTI to NFHCL, clause (49) is inserted in section 10, with effect from to grant exemption to National Financial Holdings Company Limited in respect of its income accruing, arising or received on or before This amendment will take effect retrospectively from and will, accordingly, apply in relation to the assessment year and assessment year CA VARUN JAKKINAPALLI /

7 7 New clause (34A) of section 10 With effect from assessment year : The said clause (34A) exempts buyback consideration which is subject to tax under section 115QA from taxation in the hands of a shareholder. ANALYSIS BY TAXATION OF BUYBACK OF SHARES EXISTING PROVISIONS Section 115-O Imposes a DDT of 15% on the domestic Co at the time of distribution, declaration/payment of dividend. Section 10(34) Amount of dividend liable to DDT is exempt from tax in the hands of the shareholders. Section 2(22)(iv) The consideration received by a shareholder on buyback of shares by the company is not treated as dividend. Any payment made by a company on buyback of its own shares in accordance with section 77A of the Companies Act, 1956 shall not be treated as dividend. Section 46A Buy Back consideration taxed as capital gains. LOOPHOLE: Consequently unlisted companies, as part of tax avoidance scheme, were resorting to buyback of shares instead of payment of dividends in order to avoid payment of tax by way of DDT particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate under respective Double Taxation Avoidance Agreements. In A Mauritius, In re [2012] 20 taxmann.com 52, the AAR held that only a genuine buyback is excluded from the definition of 'dividend' under section 2(22)(iv) and exempt from DDT under section 115-O. A colourable buyback will attract DDT. In that case the buyback was held to be a colourable device for tax avoidance - to distribute dividends in the guise of buyback to avoid payment of DDT. Taking a cue from the above decision of the AAR, the Finance Act, 2013 has introduced what the Finance Minister referred to in his speech introducing the Finance Bill, 2013 as 'a final withholding tax at the rate of 20 per cent on profits distributed by unlisted companies to shareholders through buyback of shares.' : New Chapter XII-DA imposes on domestic companies an additional income-tax of 20% on income distributed to shareholders as consi-deration for buyback of its own unlisted shares. To avoid double taxation, clause (34A) has been inserted in section 10 with effect from assessment year The said clause (34A) exempts such buyback consideration in the hands of a shareholder. Thus, existing provisions of section 46A (taxation as capital gains) shall apply with effect from only to buyback of listed shares while buyback of unlisted shares shall be taxed in accordance with new Chapter XII-BA. EFFECT Section 115QA is the charging section. It defines the tax base and taxable event. The ingredients of section 115QA are as under: - Liability to pay tax is on domestic company - Such tax is on buyback of its own shares - such shares being shares not listed on any recognized stock exchange - Such buyback should be in accordance with the provisions of section 77A of the Companies Act, Amount of such tax payable is 20% of the tax base - i.e. amount of distributed income on buyback of its own shares. - Distributed income means the consideration paid by the company on buyback of shares as reduced by the amount which was received by the company for issue of such shares. - Such tax is additional income-tax, i.e., in addition to the income-tax chargeable on total income of domestic company. - Such tax is payable notwithstanding no income-tax is payable by domestic company on its total income. - Such tax shall be treated as final payment of tax in respect of said income and no further credit available to company or any such person in respect of tax so paid. - No further deduction to company or shareholder in respect of income subjected to tax as above. - Tax shall be remitted within 14 days of the date of payment of consideration. Tax rate: Tax rate is 20%. This has to be increased by surcharge of 10% and further by Education Cess of 2% and by Secondary and Higher Education Cess of 1%. Thus effective tax rate is 22.66% including SC, EC and SHEC. CA VARUN JAKKINAPALLI /

8 8 Teaser: Is it True to state: Paying out profits to shareholders via buyback route u/s 77A would become more costly than paying out dividend New provisions make payout of profits via the buyback route than paying them out through dividend route: - Dividends attract DDT of % under section 115-O. Buy-back consideration if buy-back is made as per section 77A of the 1956 Act would attract % tax. Note: Interest payable for non-payment of tax by company Section 115QB provides that where the principal officer of the domestic company and the company fails to pay the whole or any part of the tax on the distributed income, within the time allowed, he or it shall be liable to pay simple interest at the rate of one per cent for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid. Note: When company is deemed to be assessee in default Section 115QC provides that if any principal officer of a domestic company and the company does not pay tax on distributed income in accordance with the provisions of section 115QA, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income-tax shall apply. Section 10(35A) New clause (35A) inserted in section 10 exempts any income by way of distributed income referred to in section 115TA received from a securitization trust by any person being an investor of the said trust. The exemption applies with effect from assessment year The tax under section 115TA on distributed income applies only with effect from Although income distributed for the period to would not suffer tax under section 115TA, same will enjoy exemption in investors' hands. ANALYSIS BY TAXATION OF SECURITIZATION TRUSTS BACKGROUND: Securitisation of assets is an addition to the existing channels for recycling of funds by business entities. What is securitisation? - It is a process through which the future income or receivables of an organisation are transformed and sold as debt instruments. In respect of banks, a part of their loan portfolio can be packed together and off-loaded in the form of the debt instruments (called pass-through certificate) to the prospective investors with the provision that the inflow of cash in the form of recoveries shall be distributed amongst the investors. This allows the securitising organisation/bank to get funds upfront, which can be put to more productive use in the business. Intermediaries in the securitisation transaction - There are various entities involved in the securitisation transaction which include the Originator (the party/bank which has a pool of assets which it can offer for securitisation and is in need of immediate cash). Special Purpose Vehicle (SPV - the entity that will own the assets once they are securitised) is usually, in the form of a trust. It is necessary that the assets should be held by the SPV as this would ensure that the investors' interest is secured even if the originator goes bankrupt. The servicer is an entity that manages the asset portfolio and ensures that payments are made in time. The credit enhancer can be any party which provides a reassurance to the investors that it will pay in the event of a default. This could take the form of a bank guarantee also. The other parties include the credit rating agencies, the credit enhancement providers and the investors. Process of Securitisation - Original lender (bank or FI) selects and then sells various types of loans to another institution (which may promote a subsidiary for this purpose called Special Purpose Vehicle, which is a sort of Trust); - The special purpose vehicle- SPV (called issuer also) makes the payment to the original lender for the loans purchased under the arrangement; - These loans are converted into a pool of securities like debentures (called Pass Through Certificates) by SPV. - These PTCs are then sold to individual or institutional investors, who are willing to make investments; - The original lender may keep on getting recoveries from the original borrowers; - He passes on these recoveries to the SPV. - The issuer in turn passes on these recoveries to the individual/institutional investors as per the arrangement made. Securitization under the guidelines follows a two stage process which is as follows : In the first stage there is sale of single asset or pooling and sale of pool of assets to a 'bankruptcy remote' SPV in return for an immediate cash payment& In the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradable debt securities." CA VARUN JAKKINAPALLI /

9 9 NEED FOR SEPARATE TAX REGIME Mutual Funds enjoy exemption from income-tax under section 10(23D) of the Act on their income irrespective of its nature or source. If mutual fund itself carries on securitization activity, securitization income will be tax-free. But this is not possible as under the extant regulatory framework, securitization activity has to be by a special purpose vehicle separate trust which is a distinct entity. So, if Mutual Fund sets up securitization trust, income earned by trust is taxed at maximum marginal rate under section 161 and MF becomes unable to avail tax exemption under section 10(23D) on securitization income as securitization trust is separate entity and the income of trust gets taxed under section 161 at MMR. Section 161 of the Act provides that in case of a trust if its income consists of or includes profits and gains of business then income of such trust shall be taxed at the MMR in the hands of trust. Explanatory Memorandum to the Finance Bill, 2013 notes the problems faced by the securitization special purpose entities set up as trusts and the need for a special taxation regime for them as under "The special purpose entities set up in the form of trust to undertake securitisation activities were facing problem due to lack of special dispensation in respect of taxation under the Income-tax Act. The taxation at the level of trust due to existing provisions was considered to be restrictive particularly where the investors in the trust are persons which are exempt from taxation under the provisions of the Income-tax Act like Mutual Funds. In order to facilitate the securitisation process, it is proposed to provide a special taxation regime in respect of taxation of income of securitisation entities, set up as a trust, from the activity of securitisation. It is proposed to amend section 10 and also insert a new Chapter XII-EA for providing a special tax regime." Finance Minister's Speech introducing Finance Bill, 2013 in the Lok Sabha explains the avowed objects of these amendments as under: "140. In order to facilitate financial institutions to securitise their assets through a special purpose vehicle, I propose to exempt the Securitisation Trust from income tax. Tax shall be levied only at the time of distribution of income by the Securitisation Trust at the rate of 30 per cent in the case of companies and at the rate of 25 per cent in the case of an individual or HUF. No further tax will be levied on the income received by the investors from the Securitisation Trust." Salient features:- (iii) (iv) (v) In case of securitisation vehicles which are set up as a trust and the activities of which are regulated by either SEBI or RBI, the income from the activity of securitisation of such trusts will be exempt from taxation. The securitisation trust will be liable to pay additional income-tax on income distributed to its investors on the line of distribution tax levied in the case of mutual funds. - The additional income-tax shall be levied at the rate of % (i.e 25% + Surcharge +EC + SHEC) in case of distribution being made to investors who are individual and HUF and at the rate of 33.99% (i.e 30% + Surcharge +EC + SHEC)in other cases. - No additional income-tax shall be payable if the income distributed by the securitisation trust is received by a person who is exempt from tax under the Act. (for example, income of Mutual Funds exempt under section 10(23DA) irrespective of its nature and source) Consequent to the levy of distribution tax, the distributed income received by the investor will be exempt The securitisation trust will be liable to pay interest at the rate of 1% for every month or part of the month on the amount of additional income-tax not paid within the specified time. The person responsible for payment of income or the securitisation trust will be deemed to be an assessee in default i.r.o amount of tax payable by him or it in case the additional income-tax is not paid to the credit of CG. New Section 32AC Investment Allowance for Manufacturing Companies for Investment in new Plant and Machinery In Paras 59 and 136 of his Speech moving the Finance Bill, 2013, the FM announced an investment allowance at the rate of 15% to a manufacturing company that invests more than Rs.100 crores in new plant and machinery during the period to This investment allowance will be in addition to the current rates of depreciation. Accordingly, the Finance Act, 2013 inserts new section 32AC 'Investment in new plant or machinery' with effect from Condition to be satisfied for availing investment allowance deduction To avail benefit of the investment allowance incentive under new section 32AC, following conditions need to be satisfied by the assessee: - Assessee is a company. - Assessee-company is engaged in the business of manufacture or production of any article or thing. - Assessee acquires and installs new asset after but before Aggregate amount of cost of such new assets acquired and installed after but before should exceed Rs. 100 crores. If above conditions are satisfied, then, there shall be allowed : for assessment year , a deduction of 15% of aggregate amount of actual cost of new assets acquired and installed during the financial year , if the cost of such assets exceeds Rs. 100 crore; for assessment year , a deduction of 15% of aggregate amount of actual cost of new assets, acquired and installed during the period beginning on and ending on , as reduced by the deduction allowed, if any, for assessment year CA VARUN JAKKINAPALLI /

10 10 Illustration 1 ABC Ltd., a manufacturing company, acquires and installs new plant and machinery of Rs. 300 crores during financial year and Rs. 200 crores during financial year In this case, deduction will be allowed as under: - Deduction that will be allowed for AY in terms of new section 32AC(1)(a)= - Deduction that will be allowed for AY in terms of new section 32AC(1)(b)= Illustration 2 ABC Ltd., a manufacturing company, acquires and installs new plant and machinery of Rs. 100 crores during financial year and Rs. 200 crores during financial year In this case, deduction will be allowed as under: Deduction that will be allowed for AY in terms of new section 32AC(1)(a)= Deduction that will be allowed for AY in terms of new section 32AC(1)(b)= Illustration 3 What will be the amount of investment allowance under section 32AC in the following cases? A Ltd. B Ltd. C Ltd. Actual cost of new asset acquired and installed during previous year (A) Actual cost of new asset acquired and installed during previous year (B) Deduction under section 32AC for assessment year Whether deduction available? i.e. whether actual cost of new asset acquired and installed during previous year exceeds Rs. 100 Cr Deduction A Ltd. B Ltd. C Ltd. Deduction under section 32AC for assessment year Actual cost of assets installed between and (C) Whether deduction available? i.e. whether (C) exceeds Rs. 100 Cr Meaning: New asset The phrase 'new asset' has been defined as new plant or machinery but does not include (iii) (iv) (v) (vi) any P&M which before its installation by the assessee was used either within or outside India by any other person; any P&M installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; any office appliances including computers or computer software; any vehicle; ship or aircraft; or any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head 'Profits and gains of business or profession' of any previous year. Meaning: Acquires and installs new asset after but before The new asset should be both acquired and installed after but before If both acquisition and installation are not completed during the said period, deduction will not be allowable. However, 'acquires and installs' does not suggest 'put to use' or 'commences production'. Note: Five year lock-in-period in respect of new assets If any new asset acquired and installed by the assessee is sold or otherwise transferred, except in connection with the amalgamation or demerger, within a period of five years from the date of its installation, the amount of deduction allowed in respect of such new asset shall be deemed to be the income of the assessee chargeable under the head "Profits and gains of business or profession" of the previous year in which such new asset is sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of such new asset. Where the new asset is sold or otherwise transferred in connection with the amalgamation or demerger within a period of five years from the date of its installation, the restrictions on non-transfer within 5 years shall apply to the amalgamated company or the resulting company, as the case may be, as they would have applied to the amalgamating company or the demerged company. CA VARUN JAKKINAPALLI /

11 11 Existing provisions Section 36(1)(viia) In computing the business income of certain banks and financial institutions, deduction is allowable in respect of any PBDD made by such entities subject to certain limits specified therein. The limits specified u/s 36(1)(viia) restrict the claim of deduction for provision for bad and doubtful debts : - For certain banks (not incorporated outside India) and certain cooperative banks to 7.5% of GTI (before deduction under this clause) of such banks and 10% of the aggregate average advance made by the rural branches of such banks. - 5% of gross total income (before deduction under this clause) under sections 36(1)(viia)(b) and 36(1)(viia)(c) for a bank incorporated outside India and certain financial institutions. Section 36(1)(vii) Provides for deduction for bad debt actually written off as irrecoverable in the books of the assessee. Proviso to Section 36(1)(vii) An assessee, to which section 36(1)(viia) of the Act applies, deduction under said clause (vii) shall be limited to the amount by which the bad debt written off exceeds the credit balance in the PBDD a/c. The provisions of section 36(1)(vii) of the Act are subject to the provisions of section 36(2) of the Act. Clause (v) of section 36(2) of the Act provides that the assessee, to which section 36(1)(viia) of the Act applies, should debit the amount of bad debt written off to the provision for bad and doubtful debts account made under section 36(1)(viia) of the Act. LOOPHOLE: The intention of the provisions is that "the banks or financial institutions are entitled to claim deduction for bad debt actually written off under section 36(1)(vii) of the Act only to the extent it is in excess of the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) of the Act." However, in Catholic Syrian Bank Ltd. v. CIT [2012] 206 Taxman 182, the Supreme Court held that deduction under section 36(1)(vii) is available to bank in respect of bad debts written off other than rural advances subject to section 36(2)(v) and independent of section 36(1)(viia). In other words, the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances. In order to clarify the scope and applicability of provision of clause (vii), (viia) of sub-section (1) and clause (v) of sub-section (2) of section 36, the Finance Act, 2013 has inserted an Explanation 2 in clause (vii) of section 36(1). The said Explanation 2 clarifies that for the purposes of the proviso to section 36(1)(vii) and section 36(2)(v), only one account as referred to therein is made in respect of provision for bad and doubtful debts under section 36(1)(viia) and such account relates to all types of advances, including advances made by rural branches. IMPACT Therefore, for an assessee to which clause (viia) of section 36(1) applies, the amount of deduction in respect of the bad debts actually written off under section 36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) without any distinction between rural advances and other advances. New clause (xvi) of section 36(1) Deduction in respect of new tax - Commodities Transaction Tax introduced by Finance Act, 2013 Chapter VII of the Finance Act, 2013 has introduced a new tax called Commodities Transaction Tax (CTT). The Finance Minister's Speech introducing the Finance Bill, 2013 explains this new tax (CTT) as under: "149. There is no distinction between derivative trading in the securities market and derivative trading in the commodities market, only the underlying asset is different. It is time to introduce Commodities Transaction Tax (CTT) in a limited way. Hence, I propose to levy CTT on non-agricultural commodities futures contracts at the same rate as on equity futures, that is at 0.01 per cent of the price of the trade " Taxable commodities transaction means a transaction of sale of commodity derivatives in respect of commodities, other than agricultural commodities, traded in recognised associations. Tax at the rate of 0.01% is payable by the seller on sale of commodity derivative. Charge of Commodities Transaction Tax:- Section 117 of the Finance Act, 2013 is the charging section. Section 117 provides CA VARUN JAKKINAPALLI /

12 12 that CTT shall be charged when following conditions are satisfied - CTT shall be charged i.r.o every 'taxable commodities transaction' (TCT) being sale of commodity derivatives - The TCC should have been entered into on or after the date of commencement of Chapter VII - CTT shall be charged at the rate of 0.01% of the value of such transaction (TCT) - CTT shall be payable by the seller of the commodity derivative. (The recognized association (assessee) shall collect CTT from sellers and deposit with Central Government) Taxable Commodities Transaction Section 116(7) of the Finance Act, 2013 defines TCT. A transaction shall be a TCT only if the following conditions are satisfied: - It is a sale of commodity derivatives - It is in respect of commodities other than agricultural commodities - It is in respect of commodities traded in recognized associations Teaser: Is trading in commodity derivatives considered as a 'speculative transaction? The Finance Minister's Speech introducing the Finance Bill, 2013 explained the amendments as under: "149. There is no distinction between derivative trading in the securities market and derivative trading in the commodities market, only the underlying asset is different. It is time to introduce Commodities Transaction Tax (CTT) in a limited way. Hence, I propose to levy CTT on non-agricultural commodities futures contracts at the same rate as on equity futures, that is at 0.01 per cent of the price of the trade. Trading in commodity derivatives will not be considered as a 'speculative transaction' and CTT shall be allowed as deduction if the income from such transaction forms part of business income. As I said, agricultural commodities will be exempt." But no provisions were there to this effect in the Finance Bill, The same were introduced as amendments to the Finance Bill, 2013 at the time of passing it. Exclusion of commodities derivatives transactions from the definition of "speculative transactions" [Section 43(5)] The amendments inserted new sub-clause (e) in section 43(5) and new Explanation 2 to section 43(5). Definition of 'speculative transaction' in section 43(5) is amended to provide that 'an eligible transaction' in respect of trading in 'commodity derivatives' carried out in a 'recognized association' shall not be regarded as 'speculative transaction'. Note: Eligible transaction - Eligible transaction means any transaction which satisfies the following conditions: (iii) (iv) It is carried out electronically on screen-based systems. It is carried out through member or an intermediary registered under the bye-laws, rules and regulations of 'recognised association' for trading in commodity derivatives in accordance with the Forward Contracts (Regulation) Act, 1952 and the rules, regulations or bye-laws made or directions issued under that Act on a recognised association. It is supported by a time-stamped contract note issued by such member or such intermediary to every client. Such contract note indicates (a) the unique client identity number allotted under the 1952 Act, rules, regulations or bye-laws (b) unique trade number and (c) PAN. Note: 'Recognised association' - 'Recognised association' means a recognized association as referred to in section 2 of the Forward Contracts (Regulation) Act, 1952 and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose. Note: Commodities derivatives - 'Commodity derivatives' shall have the meaning assigned to it in Chapter VII of the Finance Act, Section 116(5) of the Finance Act, 2013 defines the expression 'commodity derivative' to mean (A) (B) (C) a contract for delivery of goods which is not a ready delivery contract; or a contract for differences which derives its value from prices or indices of prices of such underlying goods; or of related services and rights, such as warehousing and freight; or with reference to weather and similar events and activities, having a bearing on the commodity sector CA VARUN JAKKINAPALLI /

13 13 Disallowance of certain fee, charge, etc. in the case of State Government Undertakings [Section 40(a)(iib)] LOOPHOLE State Government Undertakings are separate legal entities distinct from the State Government and are liable to income-tax. If they pay dividends to State Government which owns them, then the tax consequences are : dividend is not a deductible expense and dividend attracts dividend distribution tax under section 115-O. So, State Governments instead of taking the profits from their undertakings in the form of dividends opt to take it in the form of royalty, privilege fee, etc. exclusively levied by them on State Government undertakings. Payments in the form of these levies which are exclusive levies on State Government Undertakings do not attract DDT and are claimed as deduction by State Government Undertakings in computing their business profits. This leads to Revenue contesting them as non-genuine expenditure and colourable device to reduce taxable profits and income-tax on it and also to escape DDT. Explanatory Memorandum to the Finance Bill, 2013 states as under: "Disputes have arisen in respect of income-tax assessment of some State Government undertakings as to whether any sum paid by way of privilege fee, license fee, royalty, etc. levied or charged by the State Government exclusively on its undertakings are deductible or not for the purposes of computation of income of such undertakings. " In order to protect the tax base of State Government undertakings vis-à-vis exclusive levy of fee, charge, etc., or appropriation of amount by the State Governments from its undertakings, the Finance Act, 2013 has amended section 40 by inserting new sub-clause (iib) in section 40(a) with effect from The said new sub-clause (iib) provides that deduction shall not be allowed as deduction for the purposes of computation of income of such undertakings under the head 'Profits and gains of business or profession' in respect of : (A) (B) royalty, license fee, service fee, privilege fee, service charge or any other name whatever called if such royalty etc. is exclusively levied on a State Government undertaking by the State Government; or any amount which is appropriated directly or indirectly from a State Government undertaking by the State Government. This amendment will take effect from and will, accordingly, apply in relation to the assessment year and subsequent assessment years. Note: A State Government undertaking includes (iii) (iv) (v) a corporation established by or under any Act of the State Government; a company in which more than 50% of the paid-up equity share capital is held by the SG; a company in which more than 50% of the paid-up equity share capital is held by the entity referred to in or above (whether singly or taken together); a company or corporation in which the SG has the right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner; an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government;'. Note: The disallowance is attracted only if the following conditions are satisfied : (iii) IMPACT The amount is in the nature of fee or charge and not tax or duty The fee or charge is levied exclusively on State Government Undertakings. If levy is non-exclusive, that is, applicable to others apart from State Government undertakings also, disallowance is not attracted Levy is by State Government. If levy is by CG or any other authority, there will be no disallowance Such colourable distribution of profits by State Government undertakings to State Government will continue to be outside purview of DDT. However, deduction cannot be claimed from taxable profits. Again, these exclusive levies in the form of royalty etc. will continue to be expenditure for MAT purposes and no addition will be made to book profits as there is no corresponding amendment to section 115JB. So, these 'levies' will still be effective for reducing 'book profits' for MAT purposes but not for regular income-tax purposes. CA VARUN JAKKINAPALLI /

14 14 New section 43CA Special provision for full value of consideration for transfer of assets other than capital assets in certain cases Existing position The White Paper on Black Money presented by the Government of India points out that very high levels of stamp duty (over 5%) in many States create incentives for tax evasion through under-reporting of consideration in sale deed. To combat tax evasion through under-reporting of sale consideration in sale deeds, section 50C was inserted in the Act by the Finance Act, 2002 w.e.f In cases of transfer of capital asset being land or buildings or both, the said section deems stamp duty value as the full value of consideration where the consideration shown in sale deed is less than the stamp duty value. Currently, when a capital asset, being immovable property, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then such value (stamp duty value) is taken as full value of consideration under section 50C. These provisions do not apply to transfer of immovable property, held by the transferor as stock-in-trade. LOOPHOLE In CIT v. Kan Construction and Colonizers (P.) Ltd. [2012] 20 taxmann.com 381(All), the Allahabad High Court held that section 50C is not applicable to sale of plots by a builder since plots are his stock-in-trade and not capital assets in view of the following: - Section 50C uses the word "capital asset." For applicability of section 50C one of the essential requirements is that land or buildings sold should be capital asset. Stock in trade has been excluded from the definition of capital asset by section 2(14). - Investment in purchase and sale of plots by a builder who is indulged in selling buildings is ancillary and incidental to his business activity. "Stock-in-trade" includes all such chattels as are required for the purposes of being sold or let to hire on a person's trade. [See Stroud's Judicial Dictionary, 4th Edition, Volume 5, page 2623]. Section 43CA provides that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the stamp duty value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head "Profits and gains of business of profession". The provisions of sub-sections (2) and (3) of section 50C have been made applicable to section 43CA. Sub-section (2) of section 50C provides that, where (a) (b) the assessee claims before any Assessing Officer that the value adopted or assessed or assessable by the stamp valuation authority exceeds the fair market value of the property as on the date of transfer; the value so adopted or assessed or assessable by the stamp valuation authority has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court, the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer Sub-section (3) provides that where the value ascertained under sub-section (2) of section 50C exceeds the value adopted or assessed or assessable by the stamp valuation authority, the value so adopted or assessed or assessable by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer. Section 43CA further provides that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement for transfer of the asset. CA VARUN JAKKINAPALLI /

15 15 DIRECT TAX BATCH FOR MAY 14 & NOV 14 ATTEMPT -BY CA Varun Jakkinapalli DAY 2 BACKGROUND: Rural agricultural land in India is excluded from definition of capital asset under section 2(14) so that its transfer does not result in taxable capital gains. Urban agricultural land in India does not qualify for exclusion from the definition of 'Capital asset' under section 2(14) with the result that its transfer shall result in capital gains. AMMENDMENT Finance Act, 2013, has amended, with effect from , the definition of 'Urban agricultural land'. With effect from urban agricultural land means agricultural land situated in India in (A) (B) (iii) any area within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than 10,0000 any area within the distance, measured aerially (shortest aerial distance), not being more than 2 kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than 10,000 but not exceeding 1,00,000; or not being more than 6 kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than 1,00,000 but not exceeding 10,00,000; or not being more than 8 kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than 10,00,000 The expression 'population' shall mean population according to the last preceding census of which the relevant figures have been published before the first day of the previous year. Existing Provisions The existing provisions of Sec 56(2)(vii)(b), inter alia, provide that where any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds Rs. 50,000 the stamp duty value of such property would be charged to tax in the hands of the individual or HUF as income from other sources. LOOPHOLE The existing provision does not cover a situation where the immovable property has been received by an individual or HUF for inadequate consideration. Transactions for inadequate consideration in immovable property made taxable w.e.f. assessment year The provisions of section 56(2)(vii)(b) are amended, with effect from , so as to provide that where any immovable property is received by individual or HUF for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of the individual or HUF as income from other sources. There may be a time gap between the date of agreement and the date of registration. Therefore, it is provided that where the date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, the stamp duty value may be taken as on the date of the agreement, instead of that on the date of registration. This exception shall, however, apply only in a case where the amount of consideration, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement fixing the amount of consideration for the transfer of such immovable property. Note: Rs. 50,000 limit for difference to be applied property-wise, i.e., separately to each property received for consideration less than Stamp Duty Value and not to all such properties received during the previous year CA VARUN JAKKINAPALLI /

16 16 Section 80C - Deduction for life insurance premium Life insurance premium paid by an individual/huf is eligible for deduction under section 80C within the overall limit of Rs. 1 lakh. However, if life insurance premium paid during the year is more than 10 per cent (20 per cent if policy was issued before April 1, 2012) of actual capital sum assured, the excess amount is not considered. This limit has been increased to 15 per cent for insurance (if policy is issued on or after April 1, 2013) on the life of any person who is, (a) (b) a person with disability or a person with severe disability as referred to in section 80U; or suffering from disease or ailment as specified in rule 11DD/section 80DDB. Deduction in respect of health insurance premia [Section 80D] Existing Provisions Section 80D, inter alia, provides that the whole of the amount paid in the previous year out of the income chargeable to tax of the assessee, being an individual, any contribution made towards the Central Government Health Scheme (CGHS) or any payment made on account of preventive health check-up of the assessee or his family, as does not exceed in the aggregate Rs. 15,000, is allowed to be deducted in computing the total income of the assessee. PROBLEM However, no deduction is available to subscribers to other similar health schemes of Central Government or State Governments. Section 80D is amended by the Finance Act, 2013 with effect from assessment year so as to allow the benefit of deduction under this section within the limit of Rs. 15,000 in respect of any payment or contribution made by the assessee to such other health scheme as may be notified by the Central Government. Rajiv Gandhi Equity Savings Scheme [Section 80CCG] EXISTING PROVISIONS Section 80CCG, inter-alia, provides that a resident individual who has acquired listed equity shares in accordance with the Rajiv Gandhi Equity Savings Scheme, shall be allowed a deduction of 50% of the amount invested in such equity shares to the extent that the said deduction does not exceed Rs. 25,000. The deduction is a one-time deduction and is available only in one assessment year in respect of the amount so invested. The deduction is available to a new retail investor whose gross total income does not exceed Rs. 10,00,000. GAPS in existing provisions No tax benefits were available for investments in mutual funds. Tax benefits was available only for investment in equity shares. With a view to liberalize the incentive available for investment in capital markets by the new retail investors, the Finance Act, 2013 has amended section 80CCG so as to provide that investment in listed units of an equity oriented fund shall also be eligible for deduction in accordance with the provisions of section 80CCG. "Equity oriented fund" shall have the meaning assigned to it in clause (38) of section 10. Deduction under this section shall no longer be a one-time deduction but shall be allowed for three consecutive assessment years, beginning with the assessment year relevant to the previous year in which the listed equity shares or listed units were first acquired by the new retail investor whose gross total income for the relevant assessment year does not exceed Rs. 12,00,000. CA VARUN JAKKINAPALLI /

17 17 New section 80EE Additional deduction of interest upto Rs. 1,00,000 for first-time home buyers EXISTING TAX BENEFITS FOR INTEREST ON HOUSING LOANS Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital is deductible under section 24(b), subject to prescribed conditions. Teaser: What are the Limits MORE TAX INCENTIVES Explanatory Memorandum to the Finance Bill, 2013 clarifies that 'Keeping in view the need for affordable housing, an additional benefit for first-home buyers is proposed to be provided by inserting a new section 80EE in the Income-tax Act relating to deduction in respect of interest on loan taken for residential house property'. Paras 61 and 132 of the Finance Minister's Speech moving the Finance Bill, 2013 contain an announcement of additional deduction of interest on housing loan for first-time home buyers as under: ". a person taking a loan for his first home from a bank or a housing finance corporation upto Rs.25,00,000 during the period to will be entitled to an additional deduction of interest of upto Rs.100,000. This will promote home ownership and give a fillip to a number of industries like steel, cement, brick, wood, glass etc. besides jobs to thousands of construction workers." [Para 61] "In part A of my speech, I had referred to the tax benefit to the first-home buyer who takes a loan for an amount not exceeding Rs.25,00,000. I propose to allow such home buyers an additional deduction of interest of Rs.100,000 to be claimed in AY If the limit is not exhausted, the balance may be claimed in AY This deduction will be over and above the deduction of Rs.150,000 allowed for self-occupied properties under section 24 of the Income-tax Act."[Para 132] An additional benefit for first-home buyers is provided by inserting a new section 80EE in the Act relating to deduction in respect of interest on loan taken for residential house property, with effect from assessment year ANALYSIS BY - Deduction shall be available to an Individual assessee. Residential status is no bar. Deduction is not available to HUFs. - The assessee has taken a loan for acquisition of residential house property. - Loan should have been taken from any financial institution, i.e., banks, or housing finance company - The loan is sanctioned during the financial year Amount of loan sanctioned does not exceed Rs.25 Lakhs The value of the residential house property does not exceed Rs.40 Lakhs. - Assessee does not own any residential house property on the date of sanction of the loan. If above conditions are satisfied, then: - Deduction of interest payable not exceeding Rs. 1,00,000 shall be allowed in computing total income of the individual for assessment year Where interest payable in respect of assessment year is less than Rs. 1,00,000, balance amount of deduction shall be allowed in assessment year Note: 'Acquisition' - The word used is 'acquisition' and not 'construction'. The former word has wider scope than the latter. - "Acquisition" is a wide enough to cover purchase of a readymade second-hand house. It need not be restricted to construction of a brand new house. - There is no requirement as to when acquisition of residential house property take place. It can be earlier than financial year Only requirement is that loan should be sanctioned during Note: Date of sanction Date of sanction of loan is material. Date of making loan application is immaterial. As long as date of sanction falls during financial year , condition is satisfied. CA VARUN JAKKINAPALLI /

18 18 Note: Amount of loan sanctioned Amount of loan sanctioned shouldn't exceed Rs. 25 lakhs What if it is a joint loan? In that case, can it be Rs. 50 lakhs? It does not appear to be so Note: 'Value' of house should not exceed Rs. 40 lakhs - Value of residential house property should not exceed Rs. 40 lakhs - Question is how to determine 'value' - There is no definition of 'value'. - Nor is there any clarity on whether value will be reckoned inclusive or exclusive of registration fees, stamp duties, VAT etc. Teaser: Would Deemed Ownership constitute ownership for the purpose of this section? Note: Assessee does not "own" residential house property as at the date of sanction of the loan - Ownership of any residential house by assessee himself as on date of sanction disqualifies him for benefit under proposed section 80EE. - Ownership by spouse/huf/other family members is no disqualification. - There is no definition of "own" or "ownership" in section 80EE. Nor is the definition in section 27 made applicable to section 80EE. - Question is what if individual transfers his/her existing house to spouse without adequate consideration before date of sanction of housing loan? Of course, he/she will be deemed owner of transferred property in terms of section 27, i.e., only 'for the purposes of sections 22 to 26'. However, he/she shall not be "deemed owner" for section 80EE purposes as the definition of deemed ownership has not been extended to section 80EE. Note: "Interest payable" - There is no restriction or qualification on the expression "interest payable". - Section 2(28A) defines "interest" to include "any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized". Section 80G - Donations - 100% Deduction to National Children Fund EXISTING PROVISIONS Under the existing provisions of section 80G an assessee is allowed a deduction from his total income in respect of donations made by him to certain funds and institutions. The deduction is allowed at the rate of 50% of the amount of donations made except in the case of donations made to certain funds and institutions specified in clause of sub-section (1) of section 80G, where deduction is allowed at the rate of 100%. In the case of donations made to the National Children's Fund, deduction is allowed at the rate of 50% of the amount so donated. Teaser: What is the proforma? Finance Act, 2013 has amended section 80G to allow 100% deduction in respect of donations to National Children Fund as against 50% deduction allowed under extant provisions. This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to assessment year and subsequent assessment years. Donations to political parties & electoral trusts [Sections 80GGB and 80GGC] EXISTING PROVISIONS Under the existing provisions of section 80GGB, any sum contributed by an Indian company to any political party or an electoral trust in the previous year, is allowed as deduction in computing the total income of such Indian company. A similar deduction is available to an assessee, being any person other than local authority and artificial juridical person under section 80GGC. CA VARUN JAKKINAPALLI /

19 19 DEFECTS in existing provisions There is no specific mode provided for making such contribution. Even cash donations are eligible for deduction at present. With a view to discourage cash donations to political parties and electoral trusts by the contributors, the Finance Act, 2013 has amended sections 80GGB and 80GGC so as to provide that no deduction shall be allowed under the sections in respect of any sum contributed by way of cash. This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. Section 80-IA deduction - Extension of sunset date in case of power sector Existing provisions Under the existing provisions contained in clause (iv) of sub-section (4) of section 80-IA, a deduction of profits and gains is allowed to an undertaking which, (a) (b) (c) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on 1st April, 1993 and ending on 31st March, 2013; starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on 1st April, 1999 and ending on 31st March, 2013; undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time during the period beginning on 1st April, 2004 and ending on 31st March, With a view to provide further time to the power undertakings to commence the eligible activity to avail the tax incentive, section 80-IA is amended so as to extend the terminal date by a further period of one year, i.e., up to 31st March, These amendments will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. Deduction for additional wages in certain cases [Section 80JJAA] Existing provisions Section 80JJAA provides for a deduction of an amount equal to 30% of 'additional wages' paid to the 'new regular workmen' in excess of 100 'workmen' employed in any previous year by an Indian company in its industrial undertaking engaged in manufacture or production of article or thing. For this purpose all employees may be categorized as follows: DO YOU REMEMBER Category Nature of employment A Employees employed mainly in a managerial or administrative capacity. Employees employed in a supervisory capacity drawing wages exceeding Rs per mensem B Casual workmen and workmen employed through contract labour but not falling under category A C Other workmen (not falling under categories A and B) employed for less than 300 days during the previous year D Other workmen (not falling under categories A and B) employed for 300 days or more during the previous year Regular workmen (RW)/ Workmen (W) Neither W nor RW W but not RW W but not RW W and RW Deduction to be worked out as under : 1. Whether No. of "workmen" (B+C+D) employed during previous year exceeds 100? 2. If answer to 1 is "yes", then find out wages paid to "regular workmen" in excess of initial 100 workmen employed during the previous year 3. 30% of the wages determined in 2 above is the amount of deduction. The deduction is available for three assessment years including the assessment year relevant to the previous year in which such employment is provided. No deduction under this section is allowed if the industrial undertaking is formed by splitting up or reconstruction of an existing undertaking or amalgamation with another industrial undertaking. CA VARUN JAKKINAPALLI /

20 20 LOOPHOLE In ACIT v. Texas Instruments India (P.) Ltd. Bang. - Trib., assessee-company was engaged in the development, design and manufacture of software. For the relevant assessment years the assessee had claimed deduction under section 80JJAA in respect of additional salary/wages paid to the new employees who had joined as software engineers (systems engineer, test engineer, software design engineer, IC design engineer, lead engineer). The ITAT held that as the engineers employed were not in the category of supervisory control, assessee was entitled to deduction in respect of salaries/wages paid to them. Explanatory Memorandum "The tax incentive under section 80JJAA was intended for employment of blue collared employees in the manufacturing sector whereas in practice, it is being claimed for other employees in other sectors also". To restrict deduction under the section to employment of blue-collared employees in manufacturing sector, the Finance Act, 2013 has amended section 80JJAA so as to provide that the deduction shall be available to an Indian Company deriving profits from manufacture of goods in a factory. Sub-section (2) of section 80JJAA is amended to provide that the deduction shall not be available if the factory is - hived off or - transferred from another existing entity or - acquired by the assessee company as a result of amalgamation with another company. The earlier condition that industrial undertaking not formed by splitting up or reconstruction of an existing undertaking has been dropped. Sections 90 & 90A-DTAAs EXISTING PROVISIONS Section 90 empowers the Central Government to enter into an agreement with the Government of any foreign country or specified territory outside India for the purpose of (iii) granting relief in respect of avoidance of double taxation, exchange of information, and recovery of taxes. Section 90A empowers the CG to adopt any agreement between specified associations for abovementioned purposes. In exercise of this power, the Central Government has entered into various Double Taxation Avoidance Agreements (DTAAs) with different countries and has adopted agreements between specified associations for relief of double taxation. The scheme of interplay between DTAA and domestic legislation ensures that a taxpayer, who is resident of one of the contracting country to the DTAA, is entitled to claim applicability of beneficial provisions either of DTAA or of the domestic law. Sub-section (4) of sections 90 and 90A inserted by Finance Act, 2012 makes submission of Tax Residency Certificate (TRC) containing prescribed particulars (Rule 21AB and Form Nos. 10FA and 10FB), as a condition for availing benefits of the agreements referred to in these sections. LACUNA The Explanatory Memorandum to Finance Bill, 2012 mentioned that TRC is necessary condition but not sufficient condition. However, this position is not clear from the text of the provisions. Besides sub-section (4) of sections 90 and 90A introduced by the Finance Act, 2012 requires TRC to certain prescribed particulars which may cause hardships. TRCs are issued by Foreign Governments and every Government would have its own format. This would cause hardships to foreign resident taxpayers covered by DTAA. S - Following amendments are made to sections 90 and 90A Amended sub-section (4) of section 90, with effect from , provides that an assessee, not being a resident, to whom an agreement referred to in sub-section (1) of section 90 applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. New sub-section (5) of section 90, with effect from , provides that the assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed. (iii) (iv) Similarly amended sub-section (4) of section 90A, with effect from provides that an assessee, not being a resident, to whom the agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any specified territory outside India, is obtained by him from the Government of that specified territory. New sub-section (5) of section 90A, with effect from , provides that the assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed. CA VARUN JAKKINAPALLI /