Get Ready For Budget 2013 – Chidu Style

It is worth appreciating that the tax professionals send the pre-budget representations very objectively for the consideration of Honourable Finance Minister, however the Honourable Finance Minster or his team to the reasons best known to them does not interact or send invitation to the tax professional organizations while in the process of preparing the Finance Bill.

On one of the occasions, then member legislation after presentation of Budget came to Mumbai to interact with tax representatives of The Bombay Chartered Accountant’s Society and the Chamber of Tax Consultants had a half day interactive meeting with them, after the meeting he was fully convinced that Bill required many amendments, however he said he will not be able to suggest so many amendments and he can suggest only few amendments. He expressed the view that if he had an opportunity of interacting with tax professional organisations before introduction of Finance Bill he would have considered many of the very constructive suggestions made by the tax professionals. We are of the opinion that it is the professionals who in day to day practice in tax law always send the suggestions objectively, without any fear or vested interest they take into consideration the interest of the nation and stability in tax law. I wish and hope the Honourable, Finance Minster does interact with the tax professionals before introduction of Finance Bill in every year. This year also the All India Federation of tax Practioners, The Bombay Chartered Accountants’ Society, The Chamber of Tax Consultants and the Institute of Chartered Accountants of India have sent their detailed representations on direct and indirect taxes. Few important suggestions made by these professional organisations on Direct taxes are highlighted for the benefit of tax professionals for their consideration and debate.

Suggestions are divided in to three parts, conceptual, specific amendments, and increase in limits.

1. Conceptual Issues

I. Tax payers pension scheme may be introduced as a Social Security measures linked with PAN and Aadhar Card.

It is suggested that a Taxpayer’s Pension scheme to be introduced as a social security measure under which a portion of Income-tax paid by an assessee (say 15% of taxes paid along with a reasonable rate of interest linked to tax free government bond) is returned back to them in annual installments after attaining age of 62 years by way of direct transfer mechanism on the line of direct distribution of subsidy being introduced based on Aadhar Card. This will help as social security measure and will encourage the voluntary compliance of paying the taxes. It will also encourage that more you pay the tax your pension will increase.

II. Corporate Social Responsibility Costs.

It is suggested that:

a) A deduction of the expenditure on community /social development (both capital and revenue) be introduced, specifically covering critical areas like education, health, animal husbandry, water management, women empowerment, poverty alleviation and rural development.

b) Even in cases where a company has its own trust or foundation, the deduction in respect of expenditure incurred for Corporate Social Responsibility Costs. (CSR) activities may be allowed.

c) Such expenses, however should be subject to a limit say 5% of total income.

III. Accountability and transparency in tax administration

Strong representation was made to bring the accountability provision as recommended by Dr. Raja Chelliah in his report (1992) 197 ITR 177 (St) Para.5.9.P. 257). This will benefit the honest tax payers.

IV. Retrospective amendments

Frequent amendments with retrospective effect make the Income-tax Act more complicated. It is suggested that law may not be amended retrospectively to nullify the order of Apex Court, High Courts or Tribunal which are in favour of assessee. Frequent amendments with retrospective effect has shaken the confidence of Investors. It may be avoided. Law may be amended retrospectively to grant reliefs or to avoide the litigations.

V. ‘Once in a lifetime’ settlement provisions

Assessees may be given an opportunity to settle disputes “once in a life time”, though no proceedings are pending against him or in cases the appeal may be pending before the Assessing Officer, Commissioner (Appeals )or Tribunal. When tax in disputes is less than 5 lakhs power may be given to Chief Commissioners or if it is more than 5 lakhs the Settlement Commission may be given the power to settle the disputes. This may help to many assessees to come clean and settle the tax in dispute.

VI. Advance Ruling for residents – Scope may be extended.

One of the very important provisions introduced in the Maharashtra VAT legislation is the provision for obtaining Advance ruling on the interpretations of any provision of the Act, Rules or Notification in respect of a transaction proposed to be undertaken by any registered dealer even though any question relating to the said provision has not arisen in any proceeding. The Advance ruling will be given by the Bench consisting of three members of Sales Tax Tribunal, Senior Practitioners nominated by the President of the Tribunal and Officer of Sales Tax Department not below the rank of Jt. Commissioner nominated by the Commissioner of Sales Tax. We are of the opinion that, if all states introduce such provision in their legislation and also suggest the Union of India to introduce such provision in Income-tax Act and Central Excise, Customs & Service Tax, for all residents, it will help in reducing the litigation. We are of the opinion that the Income-tax Appellate Tribunal is more competent to decide the issues relating to Advance rulings. It is therefore suggested that in respect of residents the power of authority for Advance Rulings may be given to the Income-tax Appellate Tribunal.

VII. Appeal to high court :All pending appeals of the tax department before various High Courts, where the tax effect is less than 10 lakhs may be withdrawn.

As per the Instruction no. 3/2001. F.No 279/Misc.142 /2007 dt. 9th Feb. 2011 (2011) 332 ITR 1(ST) the department is not filing appeal before the High Court where the tax in dispute is less than 10 lakhs. However there are references which are filed earlier where the tax in dispute is less than 10 lakhs. Different High Courts have taken different view as to the applicability of the circulars to pending matters. It is desired that a provision may be introduced in the Act itself stating that limit prescribe din the said circular may be made applicable to all pending references and appeals. This will save substantial amount of Government and precious time of Court. Reason being as per the old provision for giving effect to the order of High Court , the matter has to be sent back to the Tribunal. After the order of Tribunal the Assessing Officer will give effect. At present there is no mechanism wherein one can find out whether orders of High Court or Order of Supreme Court has been given effect to or not.

VIII. All orders of Assessing Officer may be made appealable

Under present Income-tax Act there are 35 sections for which appeals are provided. In proposed Direct taxes code Bill, 2010, the twenty first schedule refers to 24 Clauses. Law may be made simple by stating that any order passed by Income-tax authority i.e. Assessing Officer/Tax recovery Officer etc, which has the effect of adversely affecting an assessee may be made appealable before the Commissioner of Income tax (Appeals). This will help the assessee as well as department. When no appeal is provided the assessee has no option than to approach the High Court by way of writ jurisdiction. Proposed suggestion will help to reduce substantial litigation.

IX. Orders of Commissioners may be made appealable to Tribunal in all cases to reduce the burden of High Courts.

At present, the assessee can file an appeal only against the order under section 263 passed by the Commissioner (Revision Order) and rejection order under section 12AA. There are number of other orders passed by the Commissioner for which no appeal is provided. Some of the orders of Commissioners which are creating hardships to assessees are –

a) Order under section 179.

b) Order under section 264.

c) Order under section 273A.

d) Not staying the Recovery when appeals are pending before first appellate authority.

e) Order passed by the tax authority to auction the property.

f) Issue of notice under section 148.

g) Waiver of interest under section 234A, 234B & 234C.

To decide the issues relating to above matters, the authorities have to go into details about facts. The Income-tax Appellate Tribunal being a final fact finding authority under Direct Taxes, it is desirable that the appeal may be heard and disposed of by the Income-tax Appellate Tribunal and thereafter the aggrieved party may file an appeal before High Court on question of law. If such a provision is introduced stating that all orders passed by the commissioners are appealable to Tribunal, the precious time of various High Courts can be utilized for rendering justice to people at large.

X. Agricultural income.-New section 139(I0)

At present there is no provision requiring the persons having agricultural income to file their return of income if they do not have any other taxable income. It is suggested that section 139(I0) may be introduced stating that persons earning agricultural income in excess of 5 lakh need to file compulsorily return of Income and declare the amount of agricultural income earned, even they do not have any other taxable income.

XI. Modernisation and research of Judiciary deserves special attention.

In the year 2008 (AIFTP Journal-March, 2008) Federation has made an appeal to Government of India to allocate a specific amount to modernization of the Institution of Judiciary. In the year 2010, the Government of India allocated an amount of Rs 5000 crores as a grant for the States to improve the justice delivery systems, including strengthening of alternative dispute resolution mechanisms. We hope this year also the Honourable Finance Minster will allocate at least Rs. 10,000 crore for modernization and research in justice delivery systems. The E- Court of Tribunal which is started by Income tax Appellate Tribunal is functioning very satisfactorily. We have also made an appeal to have E-Bench of Supreme Court to be linked with various High Courts. If Government can develop the concept of mobile E-Court, it will aid to delivering speedy and inexpensive justice at peoples door step. By use of technology it is possible and the Income-tax Appellate Tribunal , E-Court is an example.

2. Specific provisions.

XII. S. 15: Standard deduction for salaried employees.

The standard deduction under section 16 may be restored. The standard deduction may be fixed at 20% of salary, but maximum may be restricted up to Rs 750000.

XIII. S. 36(1)(va): Due date for crediting contribution of employees to the respective fund. Section 36(1)(va) read with section 2(24)(x).

It is suggested that the due date defined under Explanation to section 36(1)(va) shall be amended and accordingly the due date shall mean the due date for filing return of income under section 139(1), thereby bringing it at par with due date specified for the Employer’s contribution under section 43B of the Act.

XIV. S. 40(a)(ia):Amendment by the Finance Act, 2012 and section 201.

The provisions of Section 40(a)(ia) and section 201 may be amended retrospectively with effect from 1-4-2005 in order to clarify the real intent of law and to remove hardship, which will help to reduce litigations.

The later part of the second proviso many be suitably amended to provide that it shall be deemed that the assessee has deducted tax in the relevant previous year and paid the tax on such sum on or before due date of furnishing the return of income.

XV. S.47(xiv):Limited liability partnership (LLP)

1. Section 47(xiv) provides that conversion of sole proprietor concern into company would not be regarded as “transfer” for the purpose of capital gains. However, there is no similar provision for exemptions on conversion of proprietary concern in to LLP. It is suggested that conversion of sole proprietor concern into LLP may be tax neutral, subject to certain conditions. Similar exemption may also be introduced for conversion of partnership firm into LLP.

2. It is suggested that similar provision need to be inserted for LLP allowing merger and demerger and amalgamation to be revenue neutral.

3. It is suggested that there should not be threshold limit of turnover , to avail the benefit under section 47(xiiib) or alternatively the limit of total sales, turnover or gross receipts in the business of company for availing the benefit under section 47(xiiib) on coversion to LLP may be suitably increased to 1 Crore .

XVI. S. 50C: Investments – S. 54, 54EC, 54F.

Section 50C provides that while computing capital gains, stamp duty value is deemed to be the full value of consideration received or accruing as a result of the transfer. For the exemptions provided in section 54, 54EC, 54F etc , the investment amount is calculated with respect to the actual consideration received /accrued it may be provided that while calculating the exemption, the amount of consideration be considered as per the agreement value as provided in section 50C of the Act.

XVII. S. 56(2)(vii): Gifts.

Any receipts in the nature of gift, subject to certain exceptions, is taxed as income if the aggregate receipts during the year exceeds Rs 50,000/-. Similarly, receipts of certain assets without any consideration or for consideration less than fair market value, is also taxed as income, if the difference between the fair value and the consideration is more than Rs 50,000/-. It is suggested that excess of Rs. 50,000/- may be taxed and the entire amount. It is also suggested that the threshold of Rs 50,000/- may be increased to Rs 1 lakhs.

XVIII. 56(2)(vii)(e): Definition of “relative”

The existing definition of the term “relative” in relation to an individual does not include “Hindu undivided family” of which the individual is a member. Further, the existing definition of the term “relative” in relation to a Hindu Undivided family only includes any member of the family. It is therefore suggested that the definition of the term “relative” be amended to include (a) In case of individual –“Hindu undivided family of which the individual is partner” In case of a Hindu Undivided family –“Any relative of nay member of the family”

XIX. S.72: Carry forward and Set off of business losses:

1) It is suggested that the brought forward business losses may be allowed to be set off against such short term capital gain in subsequent years.

2) Gain on sale of business asset i.e. on which depreciation is granted as “business income” or least to the extent of the depreciation allowed.

XX. S.73. Losses in speculation business- Deemed speculation loss in case of companies-Deletion of explanation.

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.

a) Accordingly, as per the Explanation to Section73, 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.

b) Automation of the trading mechanism, screen based trading, controls on reporting of capital market transactions by share brokers, submission of AIRs, dematerialization 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, corporate 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.

c) The need of the hour is to encourage corporatization which could bring about more transparency and healthy business practices. However, the present provisions act as a disincentive for corporatization.

d) 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.

e) It is, therefore, suggested that the aforesaid Explanation to section 73 of the Act be deleted.

XXI. S.115JC: Special provisions for payment of tax by certain persons other than companies .

It is suggested that the provisions should be amended appropriately to clarify that the specified persons are entitled to set –off Alternate Minimum Tax paid (AMT) credit even when their adjusted total income falls below 20 lakh in a year of set off. (S.115JEE)

Further, even if the tax payer has discontinued the business, he should be allowed to be set off AMT credit, in the line with set-off of business losses allowed even after discontinuation of business.

The benefit of carry forward and set off of AMT credit should be permitted also in case of private limited , sole proprietorship to LLPs and vice versa. Corresponding amendment may also be made in section 47(xiiib)

XXII. Deduction for education expenses.

It is suggested that the deduction should be available for purchase of all kinds of books, CD’s computers, internet connection etc., the deduction may also be made available in respect of part-time course or vocational training etc by all universities and approved institutions .

XXIII. TDS on element of service tax

It may be clarified that, no tax is to be deducted on the service tax element while paying rent, payment to contractor, professional and technical services, brokerage commission etc. Service tax is not the income of the recipient. Deduction of TDS on service tax leads to double taxation which is against the principle that, ‘there cannot be tax on tax’.

XXIV. Interest under section 201(IA(II ).

Interest for delay is chargeable not for the period of delay, but for the period from which tax was deducted to the date on which such tax is actually paid. It may be illustrated as under:

TDS deducted on 31-3-2012 Rs. 1,00,000/-

Tax payable on 30-4-2012

Tax deposited on 2 -5-2012

Interest should be chargeable from 1-5-2012 to 2-5-2012 for one month .But as per existing provision it is charged for 2 months i.e. 31-3-2012 to 2-5-2012 .It was not intended by law but appears to be drafting error which needs to amended w.e.f 1-10-2009.

XXV. Gaps in electricity generations.

It is suggested that concessions or additional tax benefits may also be provided where a new building (residential/Commercial /hotel etc) installs a solar energy devices and rain harvesting instruments.

3. Increase in limits.

XXVI. S. 24(b). Interest on borrowed Capital.

It is suggested that the deduction in respect of interest on housing loan in case of self occupied property should be increased from 1.5 lakh to 3 lakh.

XXVII. S. 54EC: Exemption of capital gain on investment in certain bonds.

It is suggested that there should not be any limit as the amount is invested in Government Bonds or alternatively the present limit of 50 lakhs may be increased to atleast one crore.

XXVIII. Public provident fund.

It is suggested that a separate section may be introduced for allowing deduction in respect of amount invested in Public Provident Fund up to 1 lakh.

XXIX. S.193, 194A 194H: TDS on interest on Securities and other interest, Commission..

It is suggested that present limit of Rs 5,000/- may be increased to atleast Rs. 20,000/-. It is suggested that the threshold limits in respect of payments not subject to deduction of tax at source may be reviewed every three years.

XXX. 194J.TDS on professional fess.

It is suggested that present limit of Rs.30,000/- may be increased to at least to Rs. 50,000/-.

XXXI. Wealth tax.-Exempt motorcars

It is suggested that motor cars should be excluded from the definition of “assets”.

We hope and wish Finance Bill 2013, will be the dream budget of tax professionals and the Honourable Finance Minster will appreciate the pro-active role of tax professionals for very objective suggestions. For the benefit of professionals various professionals will be organising various lecture meetings and seminars. One of the major event of The Bombay Chartered Accountants’ Society is yearly Lecture meeting on the subject of “ Direct taxes Provisions of the Finance Bill” by Shri S.E. Dastur senior Advocate and Past President of ITAT Bar Association. This year’s lecture meeting on the subject of “Direct Tax Provisions of the Finance Bill, 2013, will be held on Monday 4th March, 2013 at 6.15 P.M. at Yogi Sabagruha, Shree Swami Narayan Mandir, Dadar (East) Mumbai -40004

It is heartening to note that on 4th March 2013 Shri S.E.Dastur will be delivering his silver jubilee Lecture on Finance Bill to The Bombay Chartered Accountants’ Society. We wish him all the best.