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Closely held companies used to issues shares at substantial premium to convert black money into white money without providing any valuation justifying the premium. Thus, the Finance Act, 2012 inserted Section 56(2)(viib) to impose tax on closely held companies receiving consideration for shares in excess of fair market value. Valuations of start ups have fallen sharply, recently, on worries over profitability, growth and intense competition. The Income-Tax Dept. discussed a controversial move to impose tax on those startups under the garb of Section 56(2)(viib) on the ground that their last round of valuation was lower than the first round. This move was likely to upset startups who were already worried over funding issue and falling valuations. Thus, there had been a long standing demand of the industry that the Govt. should either do away such tax on startups or provide a threshold exemption limit. Now the CBDT has abolished such tax on start ups. Any consideration received by start ups from resident persons in excess of fair value of shares shall not be charged to tax as income from other sources under Section 56(2)(viib).
Note :However, this benefit is not available for all startups. Tax exemption is available for only those startups which fulfill the conditions specified in notification of Govt. of India, dated 17-02-2016.
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The Central Board of Direct Taxes has issued a clarification that the income arising from transfer of unlisted shares would be considered under the head ‘capital gain’, irrespective of period of holding, subject to certain exceptions.
SECTION 45, READ WITH SECTION 28(i), OF THE INCOME-TAX ACT, 1961 – CAPITAL GAINS, CHARGEABLE AS – CONSISTENCY IN TAXABILITY OF INCOME/LOSS ARISING FROM TRANSFER OF UNLISTED SHARES
LETTER F.NO.225/12/2016/ITA.II, DATED 2-5-2016
1. Regarding characterization of income from transactions in listed shares and securities, Central Board of Direct Taxes (‘CBDT’) had issued a clarificatory Circular no. 6/2016 dated 29th February, 2016, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head ‘Capital Gain’ unless the taxpayer itself treats these as its stock- in-trade and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head ‘Capital Gain’ unless the taxpayer itself treats these as its stock- in-trade and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject.
2. Similarly, for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income. It has, accordingly, been decided that the income arising from transfer of unlisted shares would be considered under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.
3. It is, however, clarified that the above would not be necessarily applied in the situations where:
i. the genuineness of transactions in unlisted shares itself is questionable; or
ii. the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or
iii. the transfer of unlisted shares is made along with the control and management of underlying business and the Assessing Officer would take appropriate view in such situations.
4. The above may be brought to the notice of all for necessary compliance.
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The Union Government has radically liberalized the FDI regime today, with the objective of providing major impetus to employment and job creation in India. The decision was taken at a high-level meeting chaired by Prime Minister Narendra Modi today. This is the second major reform after the last radical changes announced in November 2015. Now most of the sectors would be under automatic approval route, except a small negative list. With these changes, India is now the most open economy in the world for FDI.
In last two years, Government has brought major FDI policy reforms in a number of sectors viz. Defence, Construction Development, Insurance, Pension Sector, Broadcasting Sector, Tea, Coffee, Rubber, Cardamom, Palm Oil Tree and Olive Oil Tree Plantations, Single Brand Retail Trading, Manufacturing Sector, Limited Liability Partnerships, Civil Aviation, Credit Information Companies, Satellites- establishment/operation and Asset Reconstruction Companies. Measures undertaken by the Government have resulted in increased FDI inflows at US$ 55.46 billion in financial year 2015-16, as against US$ 36.04 billion during the financial year 2013-14. This is the highest ever FDI inflow for a particular financial year. However, it is felt that the country has potential to attract far more foreign investment which can be achieved by further liberalizing and simplifying the FDI regime. India today has been rated as Number 1 FDI Investment Destination by several International Agencies.
Accordingly the Government has decided to introduce a number of amendments in the FDI Policy. Changes introduced in the FDI policy include increase in sectoral caps, bringing more activities under automatic route and easing of conditionalities for foreign investment. These amendments seek to further simplify the regulations governing FDI in the country and make India an attractive destination for foreign investors. Details of these changes are given in the following paragraphs:
1. Radical Changes for promoting Food Products manufactured/produced in India
It has now been decided to permit 100% FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India.
2. Foreign Investment in Defence Sector up to 100%
Present FDI regime permits 49% FDI participation in the equity of a company under automatic route. FDI above 49% is permitted through Government approval on case to case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country. In this regard, the following changes have inter-alia been brought in the FDI policy on this sector:
i) Foreign investment beyond 49% has now been permitted through government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded. The condition of access to ‘state-of-art’ technology in the country has been done away with.
ii) FDI limit for defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959.
3.Review of Entry Routes in Broadcasting Carriage Services
FDI policy on Broadcasting carriage services has also been amended. New sectoral caps and entry routes are as under:
Sector/Activity New Cap and Route
(1) Teleports(setting up of up-linking HUBs/Teleports);
(2) Direct to Home (DTH);
(3) Cable Networks (Multi System operators (MSOs) operating at
National or State or District level and undertaking upgradation of 100%
networks towards digitalization and addressability);
(4) Mobile TV; Automatic
(5) Headend-in-the Sky Broadcasting Service(HITS)
188.8.131.52.2 Cable Networks (Other MSOs not undertaking upgradation of networks towards digitalization and addressability and Local Cable Operators (LCOs))
Infusion of fresh foreign investment, beyond 49% in a company not seeking license/permission from sectoral Ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require FIPB approval.
The extant FDI policy on pharmaceutical sector provides for 100% FDI under automatic route in greenfield pharma and FDI up to 100% under government approval in brownfield pharma. With the objective of promoting the development of this sector, it has been decided to permit up to 74% FDI under automatic route in brownfield pharmaceuticals and government approval route beyond 74% will continue.
5. Civil Aviation Sector
(i) The extant FDI policy on Airports permits 100% FDI under automatic route in Greenfield Projects and 74% FDI in Brownfield Projects under automatic route. FDI beyond 74% for Brownfield Projects is under government route.
(ii) With a view to aid in modernization of the existing airports to establish a high standard and help ease the pressure on the existing airports, it has been decided to permit 100% FDI under automatic route in Brownfield Airport projects.
(iii) As per the present FDI policy, foreign investment up to 49% is allowed under automatic route in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service. It has now been decided to raise this limit to 100%, with FDI up to 49% permitted under automatic route and FDI beyond 49% through Government approval. For NRIs, 100% FDI will continue to be allowed under automatic route. However, foreign airlines would continue to be allowed to invest in capital of Indian companies operating scheduled and non-scheduled air-transport services up to the limit of 49% of their paid up capital and subject to the laid down conditions in the existing policy.
6. Private Security Agencies
The extant policy permits 49% FDI under government approval route in Private Security Agencies. FDI up to 49% is now permitted under automatic route in this sector and FDI beyond 49% and up to 74% would be permitted with government approval route.
7. Establishment of branch office, liaison office or project office
For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, it has been decided that approval of Reserve Bank of India or separate security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.
8. Animal Husbandry
As per FDI Policy 2016, FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture is allowed 100% under Automatic Route under controlled conditions. It has been decided to do away with this requirement of ‘controlled conditions’ for FDI in these activities.
9. Single Brand Retail Trading
It has now been decided to relax local sourcing norms up to three years and a relaxed sourcing regime for another five years for entities undertaking Single Brand Retail Trading of products having ‘state-of-art’ and ‘cutting edge’ technology.
Today’s amendments to the FDI Policy are meant to liberalize and simplify the FDI policy so as to provide ease of doing business in the country leading to larger FDI inflows contributing to growth of investment, incomes and employment. PIB
U.S.-India Business Council Applauds FDI Reforms in Several Critical Sectors
June 20, 2016 – Washington, DC – The U.S.-India Business Council (USIBC) today applauded a series of reforms and liberalization announcements made by the Government of India. On the heels of Prime Minister Modi’s visit to Washington, D.C., which included major investment announcements by companies such as Amazon and Star India, the notice that the Government of India would liberalize Foreign Direct Investment (FDI) in sectors such as defense, broadcasting services, civil aviation, and pharmaceuticals further buoyed investor sentiment.
Dr. Mukesh Aghi, President of the U.S.-India Business Council said, “When Prime Minister Modi addressed key investors in Washington, D.C., his mandate to strengthen the Make in India initiative, creating jobs for India’s young demographic dividend and the promise of sustained focus on economic reforms could not have been stronger. The widened scope of FDI norms in defense, civil aviation, broadcasting services, and pharmaceuticals will provide a fillip to the potential of the U.S.-India bilateral trade.”
Emphasizing the benefit of a more open economy, Dr. Aghi said, “We applaud the liberalization of FDI to 74% in brownfield investments under the automatic route in the pharmaceutical sector, while also allowing investments beyond 74% and up to 100% through government approval. Allowing up to 74% through the automatic route will encourage investment to move swiftly into India in this important and growing sector and will further promote and expand healthcare access in India. The long-awaited National Civil Aviation Policy is expected to promote regional connectivity, boost tourism and stimulate the economy in tier 2-3 cities. India is the fastest growing aviation market with 21% plus growth in the domestic sector in 2015-16, and can become one of the largest aviation markets in the foreseeable future.”
Dr. Aghi also said, “India continues to attract FDIs despite an uncertain global outlook. Major improvements have taken place in India’s economy since Prime Minister Modi assumed office. These reforms include accelerated infrastructure investment, greater openness to foreign direct investment, less red tape, and a revised bankruptcy code. We had stated earlier that $45 billion is only a starting point for American companies to invest in India. With these newly announced reforms, FDIs, technology transfers, and jobs are likely to increase substantially.”
About the U.S. – India Business Council:
Formed in 1975 at the request of the U.S. and Indian governments, the U.S.-India Business Council is the premier business advocacy organization, comprised of 400 top-tier U.S. and Indian companies advancing U.S.-India commercial ties. USIBC is the largest bilateral trade association in the United States, with liaison presence in New York, Silicon Valley, and New Delhi.
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On May 5, 2016, the Lok Sabha passed the Finance Bill. The Bill which was presented originally in the Lok Sabha on February 29, 2016 has not been passed in its original shape. Various changes have been made in the Bill. New amendments have been proposed. Some earlier proposed amendments have been removed, so on and so forth. A snippet of all changes made in the Finance Bill, 2016 as passed by the Lok Sabha viz-a-viz the Finance Bill, 2016 presented originally in the Lok Sabha are presented here under.
1. Unlisted shares held for 24 months or less would be treated as short-term capital asset
As per section 2(42A) of the Income-tax Act, any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer is treated as short-term capital asset.
The aforesaid period of 36 months is treated as 12 months in case of shares held in a company. However, an amendment was made by Finance Act (No. 2) Act, 2014 to provide that the said period of 12 months won’t be applicable in respect of shares not listed in recognized stock exchange. Hence, with effect from 01.04.2015, unlisted share is treated as short-term capital asset if it is held for not more than 36 months immediately preceding the date of its transfer.
The Finance Bill, 2016 as passed by the Lok Sabha inserted a new clause to provide that the period of 36 months would be substituted with period of 24 months in case of unlisted shares. In other words, unlisted shares of company would be treated as short-term capital asset if it is held for a period of 24 months or less immediately preceding the date of its transfer.
2. When employer’s annual contribution is deemed as income received by employee
The Finance Bill, 2016 proposed an amendment to the Fourth Schedule of the Income-tax Act to provide that lower of the following shall be deemed as income of the employee:
(i) Annual contribution made by employer in excess of 12% of salary to the recognized provident fund account of the employees; or
(ii) Rs. 1,50,000
The Finance Bill, 2016 as passed by the Lok Sabha provides that any contribution by employer in excess of 12% of salary to the recognized provident fund account of the employees shall be deemed as income of employee. The ceiling limit of Rs. 1.50 lacs has been removed from the approved Finance Bill.
3. TCS collection at the time of receipt only in specific cases
The Finance Bill, 2016 proposed that every seller of a motor vehicle shall collect TCS at the rate of 1% of value of motor car if such value exceeds ten lakh rupees. Such tax was proposed to be collected from the buyer under section 206C at the time of debiting the amount receivable or at the time of receipt, whichever happened earlier.
The Finance Bill, 2016 as passed by the Lok Sabha provides that tax shall be collected under Section 206C only at the time of receipt of consideration.
4.Section 270A – Computation of tax on under reported income
Under the existing provisions, penalty on account of concealment of income or on furnishing of inaccurate particulars of income is levied under Section 271(1)(c). In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, new Section 270A has been proposed to be inserted. It provides for levy of penalty in cases of under reporting and misreporting of income.
It is proposed that rate of penalty shall be 50% of tax in case of under reporting of income and 200% of tax in case of misreporting of income. Following amendments to Section 270A have been approved by the Lok Sabha:
(i) What constitutes under-reporting of income: The Finance Bill, 2016 proposed six instances where a person shall be deemed to have under reported his income. However, the Finance Bill, 2016 as passed by the Lok Sabha has included one more instance of under reporting of income. A person shall also be deemed to have under reported his income where the amount of total income reassessed as per Section 115JB or Section 115JC (MAT or AMT) provisions is greater than the deemed total income assessed or reassessed under provisions of the MAT or the AMT immediately before such reassessment.
(ii) Tax payable on under reporting of income: The existing clause of the Finance Bill, 2016, proposed a flat tax rate of 30% in respect of under reported income in case of Individuals, HUF, AOP, BOI, Artificial Juridical person. The Finance Bill, 2016 as passed by the Lok Sabha provides that the tax payable in respect of the under reported income shall be as under:
(a) Return not furnished: Where return of income has not been furnished and the income has been assessed for the first time, the tax shall be calculated on under reported income as increased by maximum amount not chargeable to tax.
(b) In case of loss: Where the total income assessed or re-assessed is a loss, the tax shall be calculated on under reported income as if it was the total income.
(c) In any other case: Tax on under reported income as increased by income assessed or re- assessed originally less tax on income assessed or re-assessed originally.
5.Under reporting of income shall be punishable as willful attempt to evade tax
The Finance Bill, 2016 proposed insertion of a new Section 270A to levy penalty in case of under reporting and misreporting of income by assesse. However, there was no corresponding provision to invoke prosecution in this case.
Section 276C provides for rigorous imprisonment of minimum 3 months to 7 years in case an assesse has made willful attempt to evade tax.
The Finance Bill, 2016 as passed by the Lok Sabha amends Section 276C to provide that under reporting of income as per section 270A shall be punishable with rigorous imprisonment under section 276C.
6. Processing of returns before scrutiny assessment
The Finance Bill, 2016 proposed mandatory processing of returns under Section 143(1) even when the scrutiny assessment notice is issued to the assessee. This amendment was proposed so that the assessee need not to wait for the refunds, if any, due to him till the scrutiny assessment was completed.
The Finance Bill, 2016 had provided that return shall be processed before issuing assessment order under section 143(3). However, the finance bill as passed by the Lok Sabha provides that the processing of return is not necessary before the expiry of one year from the end of the financial year in which return is furnished, where a notice is issued for scrutiny assessment under Section 143(2).
7. Benefit of 25 percent tax rates on certain domestic companies
The Finance Bill, 2016 proposed insertion of new section 115BA to provide benefit of concessional tax rate of 25% to certain domestic companies engaged in the business of manufacturing or production of any article or thing, provided such company has been set-up and registered on or after March 1, 2016.
The Finance Bill, 2016 as passed by the Lok Sabha provides that benefit of concessional tax rate shall also be available to the companies engaged in research in relation to or distribution of article or thing manufactured or produced by it.
The Finance Bill, 2016 also proposed that to avail of the concessional rate of tax, domestic company shall exercise the option in the prescribed manner on or before due date of furnishing the return of income under section 139(1) for the relevant previous year.
It is also provided that once the option to avail of benefit of concessional tax rate has been exercised by the company for any previous year, it cannot subsequently withdraw the same or for any other previous year.
8. Cost of acquisition of asset declared under Income Declaration Scheme, 2016
The Finance Bill, 2016 proposed Income Declaration Scheme, 2016 to provide an opportunity to taxpayers to declare their undisclosed income and pay tax, surcharge and penalty in aggregate at 45% of such undisclosed income.
It is provided under the scheme that where the income chargeable to tax is declared in the form of investment in any asset, the fair market value of such asset as on the date of commencement of this scheme shall be deemed to be the undisclosed income.
The Finance Bill, 2016 as passed by the Lok Sabha provides that the cost of acquisition of such asset shall be deemed to be the fair market value taken into account for purposes of Income Declaration Scheme, 2016.
9. LLPs can be ‘Eligible Start-ups’
The Finance Bill, 2016 proposed a new section 80-IAC to provide 100 percent deduction for 3 consecutive assessment years to an ‘eligible Start-up’ engaged in an eligible business. Such deduction may, at the option of assessee, be claimed for any three consecutive AYs out of the five years beginning from the year in which eligible startup is incorporated. The ‘eligible start-up’ is proposed to be defined to mean a ‘company’ engaged in an eligible business.
The Finance Bill, 2016 as passed by the Lok Sabha extends the definition of ‘eligible start-up’ to include ‘limited liability partnership’ also. In other words, LLPs shall also be eligible to claim deductions under Section 80-IAC subject to fulfillment of other conditions.
10. Levy of additional tax on dividend
The Finance Bill, 2016 had proposed an additional tax of 10% if amount of dividend received by a taxpayer exceeds Rs. 10 Lakhs.
The Finance Bill, 2016 as passed by the Lok Sabha clarified that dividend whether paid or declared or distributed by one or more domestic companies, the aggregate of dividend shall be considered for the limit of Rs.10 lakhs but Tax shall be payable only on the amount of dividend exceeding Rs 10 lakhs.
11. Tax on income from patent developed and registered in India
The Finance Bill, 2016 proposed insertion of new section 115BBF to tax royalty income in respect of a patent developed and registered in India at the rate of 10%.
The Finance Bill, 2016 as passed by the Lok Sabha inserts two new sub-sections in Section 115BBF to provide as follows:
(a) Assesse may exercise the option for taxation of income from patents in accordance with the provisions of section 115BBF, in prescribed manner on or before the due date of furnishing of return of income under section 139(1) of the relevant previous year.
(b) If assesse opts for taxation of income from patents as per section 115BBF in any previous year and fails to offer tax on income from patents as per section 115BBF in any of the 5 succeeding assessment years then he shall not be eligible to claim benefit of said section for 5 assessment years subsequent to the assessment year in which such income has not been offered to tax as per section 115BBF.
The Finance Bill, 2016 also provided that for the purpose of section 115BBF, patent shall be developed and registered in India. The word ‘developed’ had been described in the Explanations to mean the expenditure incurred by the assesse for any invention in respect of which patent is granted under the Patents Act, 1970.
The Finance Bill, 2016 as passed by the Lok Sabha specifically provides that the meaning of “developed” shall mean at least 75 percent of the expenditure incurred in India by the eligible assesse for any invention in respect of which patent is granted under the Patents Act, 1970.
12. Transfer of shares through a recognized stock exchange located in IFSC
In order to mobilize growth of International Financial Services Centers (IFCS), the Finance Bill, 2016 proposed that no Securities Transaction Tax (‘STT’) and Commodities Transaction Tax (‘CTT’) shall be levied on transactions of securities carried out through recognized stock exchange located in IFSC where the consideration for such transaction is paid or payable in foreign currency.
Consequently, it was proposed to amend the section 10(38) of the Income-tax Act to provide that long-term capital gains arising from transfer of equity shares, equity oriented mutual fund or units of business trust shall be exempt from tax if the transaction is undertaken in foreign currency through a recognized stock exchange located in an IFSC, even if STT is not paid in respect of such transactions.
However, no such amendment was proposed to section 111A [short-term capital gain arising from transfer of listed securities].
Therefore, the Finance Bill, 2016 as passed by the Lok Sabha makes similar amendment to section 111A to provide that short-term capital gains arising from transfer of underlying securities shall be taxable at 15%, if the transaction is undertaken in foreign currency through a recognised stock exchange located in an IFSC, even if STT is not paid in respect of such transactions.
13. Amortization of spectrum fee
The Finance Bill, 2016 proposed to insert a new section 35ABA to provide that the spectrum fee paid for auction of airwaves shall be allowed to be deducted over the useful life of the spectrum.
The Finance Bill, 2016 as passed by the Lok Sabha also provides for consequences if specified conditions are not fulfilled. If subsequently there is a failure to comply with any of the conditions, the deduction shall be treated as wrongly allowed and the Assessing Officer may re-compute the total income of the assessee for the respective previous years. It is also provided that the provisions of Section 154 shall apply for four years from the end of the year in which the default is made.
14. Relief to specific Non-Residents from the tax deduction under section of 194LBB
The Finance Act, 2015 had inserted a special taxation regime in respect of Category I and II Alternative Investment Funds (investment fund) registered with the SEBI. Under this regime the income of the investment fund (not being in the nature of business income) is exempt in the hands of investment fund. However, income received by the investor from the investment fund (other than the income which is taxed at the level of investment fund) is taxable in their hands. Accordingly, Section 194LBB was inserted for deduction of tax in respect of payment made to such investors.
The existing provisions of section 194LBB provide that in respect of any income credited or paid by the investment fund to its investor (resident or non-resident), a tax deduction at source (TDS) shall be made by the investment fund at the rate of 10% of the income. This TDS regime had created certain difficulties that non-resident investors, whose income was not taxable as per the relevant DTAA, were not able to claim benefit of lower or nil rate of taxation. Even section 197 didn’t provide for any facility to the deductee to approach the Assessing Officer for seeking certificate for TDS at a lower or nil rate in respect of deductions made under section 194LBB.
The Finance Bill, 2016 proposes to amend the section 194LBB to provide that tax shall be deducted at the rate of 10% where payee is resident. Where the payee is non-resident or foreign company, tax shall be deducted at the rates in force.
The Finance Bill, 2016 as passed by the Lok Sabha inserts a proviso that where payee is a non-resident, no tax shall be deducted in respect of any income which is not chargeable to tax.
15. Withdrawal of amendments relating to retirement funds
(i) Recognized Provident Fund
The Finance Bill, 2016 proposed to amend Fourth Schedule so as to provide that:
(a) Contribution: Employer’s contributions to the recognized provident fund account of the employees shall not be chargeable to tax to the extent of 12% of employee’s salary or Rs.1,50,000, whichever is less.
(b) Withdrawal of employee’s contribution: Any withdrawal from the accumulated balance in the provident fund account, which is attributable to employee’s contribution made on or after April 1, 2016, shall not be chargeable to tax up to 40 % of such accumulated balance.
The Finance Bill, 2016 as passed by the Lok Sabha withdraws such amendment to the Fourth Schedule and maintains the status-quo for the taxability of contribution to and withdrawal from the provident fund account.
(ii) Withdrawal from superannuation fund account
The Finance Bill, 2016 proposed that any payment in lieu of or in commutation of an annuity purchased out of contributions made on or after April 1, 2016, where it exceeds 40% of annuity, shall be chargeable to tax.
The Finance Bill, 2016 as passed by the Lok Sabha withdraws such an amendment.
16. Rate of MAT for unit located in IFSC
The Finance Bill, 2016 had proposed to reduce the MAT rate from existing 18.5% to 9% in case of unit located in International Financial Services Center (‘IFSC’)
In order to enjoy the lower MAT rate, following conditions were to be satisfied:
(a) The taxpayer is a unit established in IFSC
(b) The unit must be a new unit established on or after April 1, 2016
(c) It should derive its income solely in convertible foreign exchange
All units that fulfill the above conditions shall have to compute MAT at 9% of book profit instead of normal rate of 18.5%.
The Finance Bill, 2016 as passed by the Lok Sabha withdraws the condition of establishment of new IFSC unit after April 1, 2016. Consequently, the benefit of reduced rate of MAT shall also be given to those units which have been set up before April 1, 2016.
17. Immunity from penalty and prosecution in certain cases
The Finance Bill, 2016 proposed to insert section 270AA to provide immunity to the assesse from penalties under section 270A and prosecution under section 276C if the assesse pays the tax and interest within the time prescribed by the notice, provided assesse does not file an appeal against the order.
The Finance Bill, 2016 as passed by the Lok Sabha also includes immunity from prosecution under Section 276CC in the new Section 270AA.
18. Tax on Accreted Income of Trusts
The Finance Bill, 2016 proposed to insert a new Chapter XII-EB, containing Section 115TD, 115TE and 115TF, under the Act to provide that ‘accreted income’ of a trust or institution registered under section 12AA shall be chargeable to tax at the maximum marginal rates in following circumstances:
(a) If the trust or institution gets converted into any form which is not eligible under section 12AA;
(b) If the trust or institution gets merged into any entity which is not eligible under section 12AA;
(c) If the trust or institution, in case of dissolution, fails to transfer its assets to exempt entities under section 12AA and section 10(23C) (iv), (v), (vi) & (via).
The difference between the fair market value of the assets and liabilities of the trust or institution would be treated as ‘accreted income’ and tax thereon shall be paid in addition to the income-tax chargeable in respect of the total income of such trust or institution.
The Finance Bill, 2016 as passed by the Lok Sabha makes certain changes in the proposed Section 115TD, as under:
(A) Assets which don’t form part of accreted income
A provision is inserted in Section 115TD to provide that the value of the following assets shall not be taken into consideration while computing the ‘accreted income’
(a) Any asset acquired by a trust or institution out of its agricultural income.
(b) Any asset acquired by the trust before getting registered under section 12AA provided that no exemption under section 11 or 12 is provided to trust or institution during that period.
(B) Time-limit to pay tax on accreted income
As per section 115TD, a trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA in a previous year on occurrence of following events:
(a) when registration granted to it under Section 12AA has been cancelled; or
(b) It has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it:
i) has no applied for fresh registration under Section 12AA in the said previous year; or
ii) has filed application for fresh registration under Section 12AA but the said application has been rejected.
It was proposed under Finance Bill, 2016 that the tax on accreted income shall be payable within 14 days from date of receipt of order cancelling registration or date of order rejecting application for fresh registration.
The Finance Bill, 2016 as passed by the Lok Sabha has proposed new time-limit for payment of tax on accreted income. It has been prescribed that tax on accreted income shall be paid within 14 days from:
(a) the date on which the period for filing appeal before ITAT against the order cancelling the registration (or order rejecting the application) expires, if no appeal has been filed by the trust or the institution; or
(b) the date on which the order in any appeal, confirming the cancellation of the registration (or application), is received by the trust or institution.
(C) Validity of registration obtained under section 12A
The Finance Bill, 2016 as passed by the Lok Sabha has made a clarificatery amendment to provide that registration under section 12AA shall include any registration obtained under section 12A.
19. Section 80-IBA – Profit linked deduction on housing projects
The Finance Bill, 2016 proposed insertion of a new Section 80-IBA which provides for deductions from profit arising from the business of developing and building housing projects. Such deduction is available subject to fulfillment of certain conditions where project is located within cities of Chennai, Delhi, Kolkata or Mumbai or within acceptable distance from municipal limits. The Finance Bill, 2016 as passed by the Lok Sabha provides that the distance from municipal limits shall be measured aerially. Further, it is mentioned clearly that the ‘built-up area’ of the residential unit shall be relevant to check if the size of the residential unit is within threshold limit of 30 sq. meter or 60 sq. meter, as the case may be.
20. Limit on deduction in respect of expenditure on agricultural extension project
The Finance Bill, 2016 had proposed to limit the deduction allowed under section 35CCC from existing 150% to 100% w.e.f April 1, 2018 (Assessment year 2018-19).
The Finance Bill, 2016 as passed by the Lok Sabha defers the applicability of this provision from April 1, 2018 to April 1, 2021 (Assessment Year 2021-22).
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Presently, most of the field formations follow the manual handing over/ dispatch of cheques for payment of refund/rebate. Consequent to the sanction of refund/ rebate claims by the competent authority, cheques are being issued and the same are sent by either registered post or handed over to authorized persons. The present procedure entails paper work, manpower deployment by the claimants and delay in payment of refunds.
In order to speed up the transfer of the fund directly to the beneficiary’s bank account after sanction of the refund/rebate claim and thereby promote ease of doing business, the following procedure for e-payment of refund/ rebate is hereby prescribed for implementation by all field formations:
E-PAYMENT THROUGH AUTHORIZED BANKS
PROCEDURE FOR E-PAYMENT
a) While filing refund/ rebate claim for the first time, the claimants opting for this facility shall provide one-time authorization in duplicate, duly certified by the beneficiary bank in a prescribed format (enclosed as Annexure-A). One copy shall be retained by the department and one copy shall be sent to the bank with the first refund sanction order of the applicant.
b) The refund sanctioning authority would forward to the authorized bank at periodic intervals:
i) a signed statement (copy of sample format enclosed as Annexure-B) of sanctioned orders which inter alia contains details of the beneficiaries and the amounts sanctioned,
ii) a cheque in favour of the bank as mentioned above for the consolidated refund/rebate amount,
iii) a soft copy of the above statement to the banks through e-mail.
c) The refund sanctioning authority shall ensure that at least one signed statement of sanctioned orders along with a cheque for the consolidated refund/rebate amount, in the prescribed format (Annexure-B), is forwarded to the authorized bank in a given month. The said statement shall cover the details of all the refund/ rebate orders sanctioned till the date of forwarding of statement to the bank.
d) Upon receipt of the statement signed by the refund sanctioning authority and the cheque for the consolidated refund amount, the bank would credit the refund amounts to the respective accounts of the claimants through NEFT/RTGS after deducting the applicable NEFT/ RTGS charges as per RBI guidelines. Commissioners are expected to ensure that there is no delay in the disbursal of the sanctioned amounts.
III. PROCEDURE FOR RECONCILIATION
CIRCULAR NO 1013/1/2016-CX., Dated: January 12, 2016
As per paragraph 38(1) of the EPF Scheme, 1952, paragraph 3 of EPS, 1995 and paragraph 8(1) of EDLI Scheme, 1976, the employers are required to pay the contributions and administrative charges within fifteen days of close of every month. The employer, as per para 5.1.3 of Manual of Accounting Procedure(Part-I General), is also allowed a grace period of 5 days to remit the contribution.
The grace period of five days have been allowed for the employers to remit the contributions as the system of calculation of wages of the employees and their corresponding dues under the three schemes(Employees’Provident Fund Scheme 1952, Employees’ Pension Scheme 1995 & Employees’ Deposit Linked Insurance Scheme 1976) were done manually and its remittances in the bank required additional time in the earlier manual setup.
In the present era, employers compute the wages and EPF liabilities electronically (in most of the cases on real time basis) and the Electronic Challan-cum-Return(ECR). The remittances are also being deposited through Internet banking. This has reduced the process and time taken in calculation of PF dues and its remittances in the bank. Accordingly, it has been decided that concession of grace period of 5 days available to the employers for depositing the contribution and other dues is withdrawn herewith. This decision shall apply from February 2016(Contributions for month of January 2016 and payment in the month of February 2016).
The employers shall pay the contribution and other dues as envisaged under EPF & MP Act 1952 and Schemes framed thereunder within fifteen days of close of every month.
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
WRIT PETITION (C) NO. 1072 OF 2013
MADRAS BAR ASSOCIATION
UNION OF INDIA & ANR.
J U D G M E N T
A.K. SIKRI, J.
This writ petition filed by the petitioner, namely, the Madras Bar Association, is sequel to the earlier proceedings which culminated in the judgment rendered by the Constitution Bench of this Court in Union of India v. R. Gandhi, President, Madras Bar Association1 (hereinafter referred to as the ‘2010 judgment’). In the earlier round of litigation, the petitioner had challenged the constitutional validity of creation of National Company Law Tribunal (‘NCLT’ for short) and National Company Law Appellate Tribunal (‘NCLAT’ for short), along with certain other provisions pertaining thereto which were incorporated by the Legislature in Parts 1 B and 1 C of the Companies Act, 1956 (hereinafter referred to as the ‘Act, 1956′) by Companies (Second Amendment) Act,2002.
Writ petition, in this behalf, was filed by the petitioner in the High Court of Madras which culminated into the judgment dated 30.03.2004. The High Court held that creation of NCLT and vesting the powers hitherto exercised by the High Court and the Company Law Board (‘CLB’ for short) in the said Tribunal was not unconstitutional. However, at the same time, the High Court pointed out certain defects in various provisions of Part 1B and Part 1C of the Act, 1956 and, in particular, in Sections 10FD(3)(f)(g)(h), 10FE, 10FF, 10FL(2), 10FR(3), 10FT. Declaring that those provisions as existed offended the basic Constitutional scheme of separation of powers, it was held that unless these provisions are appropriately amended by removing the defects which were also specifically spelled out, it would be unconstitutional to constitute NCLT and NCLAT to exercise the jurisdiction which is being exercised by the High Court or the CLB. The petitioner felt aggrieved by that part of the judgment vide which establishments of NCLT and NCLAT was held to be Constitutional. On the other hand, Union of India felt dissatisfied with the other part of the judgment whereby aforesaid provisions contained in Parts 1 B and 1 C of the Act, 1956 were perceived as suffering from various legal and Constitutional infirmities. Thus, both Union of India as well as the petitioner filed appeals against that judgment of the Madras High Court. Those appeals were decided by the Constitution Bench, as mentioned above.
ICAI has hosted an announcement on its website on ‘Announcement on CARO, 2003 and additional reporting under the Companies Act, 2013’, which is as follows:
“We are receiving queries from the members regarding applicability of CARO, 2003 along with Auditors’ Report on financial statements of companies for the financial year 2014-15. The Ministry of Corporate Affairs (MCA) is working on it and has constituted a Committee for this purpose to analyse the contents of the Order to be made under section 143(11) of the Companies Act, 2013 for the Financial Year 2014-15. ICAI is also a member of the said committee. We are given to understand by MCA that an Order being a smaller version of CARO 2003, applicable for the financial year 2014-15, may be notified soon under section 143(11) of the Companies Act, 2013. However, at this juncture, to bring more clarity, this Announcement is released in consultation with the Ministry.
The Companies Act, 1956 has ceased to have effect from 01st April, 2014. As a corollary, the Companies (Auditor’s Report) Order, 2003 issued under section 227(4A) of the said Act also ceases to have effect from the said date.
Section 143(11) of the Companies Act, 2013 which came into force from 01st April, 2014 provides that “the Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein.”
Accordingly, it may be noted that as when an Order is notified by the Central Government under section 143(11) of the Companies Act, 2013, the members would be required to report thereon as a part of their statutory audit reports.
Until the aforesaid Order is issued, no additional reporting under section 143(11) of the Companies Act, 2013 is required by the Auditors for the financial year 2014-15.
Private Corporate Sector is one of the most important institutional sectors in Indian economy in terms of contribution to Gross Domestic Product (GDP), Gross Fixed Capital Formation (GFCF) and also Employment. The importance of this sector is increasing over the years. With a view to revise methodology of estimation of National Account Statistics (NAS) for the Private Corporate Sector at the time of next base year revision of NAS from 2004-05 to 2011-12, a sub-committee of the Advisory Committee on National Accounts Statistics (ACNAS) on Private Corporate Sector including PPPs with following composition and terms of reference is constituted on 11.9.2013.
Terms of Reference (TOR) of the Sub-Committee:
i. To assess usability of MCA 21 data – from 23AC and 23 ACA; and also XBRL for compilation of GVA and capital formation in National Accounts.
ii. Compare the estimates prepared based on RBI sample studies for 2011-12 with those as per MCA 21 database estimates.
iii. Suggest sector-wise, Compilation Category wise method of compilation along with revision time table
iv. Suggest appropriate indicators for estimation of GVA for the years till MCA 21 data becomes available for the relevant year
v. Suggest methodology for the sectors for which data is not presently available in MCA 21 database
vi. Suggest methodology for compilation of capital formation from the projects undertaken as Public Private Partnership for development of infrastructure
vii. Suggest methodology for compilation of GVA and capital formation of the corporations engaged in non-banking financial services
viii. To examine possibility of use of MCA database for estimation of GVA for organized sector (corporate sector) of manufacturing.
Detailed Report is here http://mospi.nic.in/Mospi_New/upload/final_Report_Goldar_subcommittee2mar15.pdf