CENVAT Credit Rules
Rule 2(e) — It should be clarified that the term ‘exempted services’ includes ‘trading in goods’
Rule 2(l) — The phrase ‘input service’ should include ‘activities related to business’
Rule 6 — The Rule should be suitably amended to permit maintenance of one-to-one identification of some input services and claim of proportionate credit on other input services where one-to-one identification with taxable service is not possible
Procedural changes
- The due date for payment of service tax should be kept at 15th of the next month/ quarter
- The periodicity of filing returns should be once in a year and not once in half year
- The assessee should be permitted to revise the return within a period of 180 days
- Self Adjustment of Excess Service Tax should be allowed without any limit
To,
Mr. Pranab Mukherjee
Finance Minister
Government of India,
North Block, Vijay Chowk, New Delhi-110001.
Dear Sir,
Sub : Pre-Budget Memorandum 2012-13
We take this opportunity to present a Pre-Budget Memorandum on Direct Taxes with a request to consider the same while framing proposals in Finance Bill, 2012 for amendments to the Income-tax Act, 1961.
As mentioned in the letter inviting suggestions for Budget 2012-13, dated 2nd November, 2011, since the Direct Taxes Code, 2011 has been introduced in the Parliament and is proposed to be effective from 1-4- 2012, we are forwarding only those proposals which are urgent in nature.
We request your honour to consider the suggestions favourably. We will be pleased to present ourselves for any explanation and clarification that may be required by your honour.
Thanking you,
We remain,
Yours truly,
For Bombay Chartered Accountants’ Society
Pradip Thanawala
President
Gautam Nayak
Chairman
Taxation Committee
Pre-Budget Suggestions, 2012-13
Direct Tax Laws
SUBSTANTIAL AMENDMENTS
1. Amendments in respect of issues/points covered by the Direct Taxes Code Bill, 2010 (the DTC)
1.1 The DTC has been extensively discussed and debated across the country by various stakeholders and detailed representations have been made to the concerned authorities and before the Standing Committee of the Parliament.
1.2 It has been time and again reiterated by the Finance Minister and other concerned officials that after considering the recommendations of the Standing Committee of Parliament, the revised DTC Bill is likely to be presented to the Parliament either in the winter session or in the budget session and is likely to be made effective from 1st April, 2012.
1.3 Even assuming that due to procedural and other compulsions, the DTC Bill is not presented to the Parliament either in the winter session or in the budget session and the date from which the DTC is likely to be made effective is postponed from 1st April, 2012 to 1st April, 2013 or thereafter, it would be prudent to let the DTC take its final shape and in respect of any of the issues/matters covered by DTC, no amendment should be made in the corresponding or related provisions of the Income-tax Act, 1961 (the Act). Such amendments to the Act would also not be appropriate if the relevant amendments are already under the separate consideration of Parliament in the form of the Direct Taxes Code Bill, 2010.
1.4 It is, therefore, strongly suggested that in the Finance Bill 2012 to be presented in the Parliament in February, 2012, no amendment in respect of any of the issues/matters covered by DTC and under consideration of the Standing Committee of the Parliament/Parliament, should be proposed.
2. Deemed speculation loss in case of companies — Explanation to section 73
2.1 As per the provisions of section 73 of the Act, any loss, computed in respect of a speculation business carried on by the assessee, cannot be set off except against profits and gains, if any, of another speculation business.
2.2 As per Explanation 2 to section 28 of the Act, where speculative transactions carried on by an assessee are of a nature so as to constitute a business, the business (referred to as ‘speculation business’) shall be deemed to be distinct and separate from any other business.
2.3 As per section 43(5) of the Act, ‘speculative transaction’ means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
2.4 Accordingly, speculative business is normally understood as business in respect of transactions where settlement takes place without actual delivery.
2.5 However, as per Explanation to section 73 of the Act, where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads, ‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ and ‘Income from other sources’ or the company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
2.6 Accordingly, as per the Explanation to section 73, in case of most companies, even delivery- based share transactions are deemed to be speculative. The present provisions deeming even delivery-based purchase and sale of shares as speculative business discriminate between corporate and non-corporate assessees.
2.7 Automation of the trading mechanism, screen-based trading, controls on reporting of capital market transactions by share -brokers, submission of AIRs, dematerialisation and other measures initiated by SEBI over the last few years have brought total transparency in share trading, leaving little scope for manipulation of share trades by transfer of profits/losses from one person to another. In any case, corporates are more regulated compared to non-corporates and hence, disadvantage to companies in terms of the discriminatory tax provision as described above can hardly be justified.
2.8 The need of the hour is to encourage corporatisation which could bring about more transparency and healthy business practices. However, the present provisions act as a disincentive for corporatisation.
2.9 Further, when derivatives which are in the nature of speculative transactions are not considered as speculative transactions, there is no logic in continuing the deeming fiction of treating the transactions in shares entered into by a company as speculative transactions.
2.10 It is, therefore, suggested that the aforesaid Explanation to section 73 of the Act be deleted.
3. Provisions relating to gift: section 2(24)(xv) and section 56(2)(vii)
3.1 As per section 56(2)(vii) and section 2(24) (xv), any receipt in the nature of gift, subject to certain exceptions, is taxed as income if the aggregate receipts during the year exceed Rs. 50,000. Similarly, receipt of certain specified assets without any consideration or for consideration less than fair market value, is also taxed as income if the difference between the fair market value and the consideration is more than Rs.50,000.
3.2 The gift-related provisions were sought to be introduced twice over in the past — but were, for valid reasons, withdrawn after due consideration.
3.3 The Government should not be shy of reconsidering the wisdom and should restore the earlier position. Therefore, the earlier position whereby gifts were not taxed in the hands of the donees unless the said gifts were proved to be bogus should be restored.
3.4 Measures of rationalisation
In case for any reason, the provision has to remain on the statute, it should be rationalised appropriately. The measures of rationalisation suggested are as under:
A) The following receipts should be exempted from the charge:
a) Gift to/from Hindu undivided family by/to a member of the family.
b) Any receipt which is in the nature of damages or accident compensation or which is received on compassionate grounds.
c) Any receipt which is in the nature of prize or reward for performance at state, national or international level.
d) Any receipt, which is not in the nature of a gift.
e) Such other receipts as may be notified by the CBDT.
B) Further, there is an anomaly in the existing provisions inasmuch as a gift received by a person from his father’s brother is exempted from tax, but if the same person (i.e., the nephew) makes a gift to his father’s brother, then the latter would have to pay tax on the gifted amount if the aggregate gifts received by him exceed Rs.50,000 in a year. This anomaly needs to be removed immediately.
C) An unintended outcome of the amendment made to section 56 by the Taxation Laws (Amendment) Act, 2006 is that if a person receives gifts aggregating to more than Rs.50,000 in a year from persons other than relatives, then the entire amount of gifts would be taxed as income in his hands instead of only the amount in excess of Rs.50,000. It is suggested in order to avoid ambiguity and resulting disputes and litigation, the section be amended to clearly lay down a basic threshold limit for exemption of Rs.50,000 per year.
4. Interest, commission, brokerage, rent, royalty, fees for services, payment to contractors, etc. not to be allowed as deduction unless tax deducted at source: Section 40(a)(ia)
4.1 Section 40(a)(ia) as inserted in the Income-tax Act vide the Finance (No. 2) Act, 2004 is prone to interpretation which is wholly unintended and is likely to result in undue and unbearable hardship to the taxpayers. There is, therefore, an urgent need for a suitable amendment and/or for a suitable CBDT Circular which avoids such hardships.
4.2 Section 40(a)(ia) provides that interest, com-mission, brokerage, rent, royalty, fees for profes-sional services, fees for technical services or pay-ments under a contract or sub-contract payable to a resident will not be allowed as deduction unless tax has been deducted at source and paid in accordance with provisions of section 200.
4.3 This provision is unjust. Tax deducted at source is only one mode of recovery of tax. The person paying the amount is, in fact, doing a service to the Government by deducting tax and paying it to the Government without any compensation. To penalise him by refusing deduction of expenditure even for a small default is unfair.
4.4 There are many cases where there can be two opinions on whether tax was deductible at all. If under a bona fide belief that tax was not required to be deducted the assessee does not deduct tax, but if the Department takes a view that tax was deductible, then the assessee would be refused deduction of the whole of the expenditure. Thus, even in a bona fide case, because the assessee has failed to deduct 1% from payment to a contractor or short-deducted few rupees from a payment, he may lose 100% deduction.
4.5 Under the Income-tax Act, if there is a failure to deduct tax or to pay tax deducted, there are provisions to levy interest, penalty and also to recover the tax either from the person who has failed to deduct tax at source or from the person receiving the payment. In extreme cases, the defaulter can even be prosecuted.
4.6 In this background and with such wide powers at the disposal of the Department, this provision disallowing deduction of expenditure to the asses-see is unfair and extremely harsh.
4.7 Deduction of tax from payment to a resident must be distinguished from payment to a non-resident. In case of non-residents, payment is very often to a person whose connections with India are only transient or who may not have any assets in India to discharge the tax liability. This is not the case in respect of the payments to residents. The tax authorities have sufficient powers to recover the tax from resident receivers of income (Refer section 191).
4.8 Hence, there is no justification for such a pro-vision in case of payments to residents and section 40(a)(ia) should be deleted.
Short payment results in total disallowance!!
4.9 Also, a literal interpretation of the provision may bear out that there is likelihood of disallowance should there be short payment of tax. Though the default may be marginal, the entirety of the underlying expenditure may stand disallowed in the assessment of the assessee’s income. This can happen due to administrative lapse or error. Surely, the legislative intent can never be so harsh.
4.10 Therefore, the section should be amended and it should be provided that the disallowance would only be proportionate to the amount of tax/ surcharge/education cess short-deducted and not in respect of the entire expenses.
Need for corrective action
4.11 There are a number of other situations which demand that these provisions touching the length and breadth of the country are implemented pragmatically — if necessary, by a suitable amendment to the law without compromising on the avowed objective of inculcating TDS discipline. As one alter-native, power may be given to the Commissioners to waive defaults in genuine cases. The situations which need consideration are:
a) One can visualise cases wherein there is small or arithmetical error in compliance resulting in short payment of tax.
b) There could be valid and bona fide cases in which, based on honest difference of opinion, an assessee finds that he has applied a wrong section or finds that an inadvertent default has been committed.
c) There would be multiple cases in which, by the time, error is detected by the assessee, the recipient of income would have already paid up his taxes and/or would have been assessed to tax.
d) Indeed, in real-life situations, there can be numerous other circumstances which are beyond the control of the assessee. For example: bank strike, calamities, personal disabilities in case of proprietary or partnership concerns, Court stay, litigation, etc. We submit that all such cases require sympathetic and due consideration. Surely, it can never be the Government’s intention by introducing this provision to collect duplicated revenue from citizens, nor can it be the intention to inflict undue hardship without paying heed to the reasons which lead to unintended default or delay.
4.12 While the above is the minimum which we believe ought to be rewarded to the citizens, we would once again reiterate our consistent stand that any provision on the lines of section 40(a)(ia) is the antithesis of the theory of real income to which alone the income-tax law should be wedded. We repeat that there are adequate penal provisions in the law to deal with the defaulters and it would be too unrealistic to continue with a provision like section 40(a)(ia) which can distort the level of assessable income to incredible or unbearable proportion.
Alternative suggestion
4.13 Alternatively, if the existing provisions of sec-tion 40(a)(ia) are to continue, an amendment is required for a situation where the payee has already paid the relevant taxes. Often, the deductor may not have deducted tax at source due to oversight, and suffers disallowance of the payment under this section. However, subsequently, the payee files his return of income and makes good the shortfall in tax deduction by making payment of taxes on his own. In such cases, where the payee has paid the relevant taxes, it is not possible for the deductor, nor is it required by law for the deductor, to further deduct tax at source. In such circumstances, the deductor may suffer total disallowance of the expenditure, notwithstanding the fact that the tax in respect of such income has already been paid by the payee. Since the purpose of tax deduction at source is to ensure that taxes on the relevant income are paid, and since the deductor is no longer regarded as a defaulter once the payee has paid the taxes, there is no rationale for not allowing the deductor a deduction of such amount in the year in which the payee has made the payment of the relevant taxes.
4.14 It is, therefore, suggested that the proviso to section 40(a)(ia) be suitably amended retrospectively with effect from A.Y. 2005-06 to provide that the deduction shall also be allowed in the year in which shortfall in tax deduction has been made good by the payee by paying the relevant taxes, or shall not suffer disallowance if the payee has paid the relevant taxes before the due date of filing of the return of income of the deductor.
5. Tax on distributed profits — Section 115-O — Effect on non-resident shareholder
Tax on distributed profits is the liability of the company. Therefore, non-resident shareholders find it difficult to get credit of such tax in tax assessments in their respective countries especially when there is no direct or indirect provision for such credit either in the domestic law of their countries or in the relevant Double Tax Avoidance Agreement. In view of this, effectively, this method of collecting tax on dividend results in a benefit to the Government of the country of the non-resident rather than the non-resident investor. It is therefore, suggested that appropriate specific provisions should be made in the Act to treat such DDT as tax on dividend receipt of non-resident shareholders.
6. Increase in threshold limit for TDS — Section 194A
The threshold limits in respect of payments not subject to deduction of tax at source should be reviewed every 3 years, and should be revised up-wards taking into account the impact of inflation. In particular, the limits of Rs.5,000 and Rs. 10,000 u/s.194A for interest have not been revised since June 2007 though limits under other sections were increased in July 2010. It is, therefore, suggested that these limits be revised upwards to Rs.15,000 and Rs.30,000, respectively.
