Decoding Union Budget 2019-20: Are Proposed Amendments in Finance (No. 2) Bill 2019 identify with a Satiated Elephant satisfied with few mounds of rice or an Insatiate Elephant trampling fields?
The Hon'ble Finance Minister Smt. Nirmala Sitharaman, while presenting the Union Budget 2019-20, before the Parliament, in her maiden budget speech in Modi 2.00 Government, commenced with her Direct Tax Proposals by thanking and acknowledging the valuable contribution of taxpayers in the all-round growth of our Nation.
At this juncture, she found wisdom in a line from Pura Nanooru, a Tamil Sangam Era work by Pisirandaiyaar. The verse ,” Yannaipugundhanilam” was sung as an advice to the King Pandian ArivudaiNambi, the English translation of which comes out as under:
“a few mounds of rice from paddy that is harvested from a small piece of land would suffice for an elephant. But what if the elephant itself enters the field and starts eating? What it eats would be far lesser than what it would trample over !”
Admiringly, in the above verse, by referring the Government as the Elephant, the Taxpayer as the Farmer of the Paddy Field and the Mounds of Rice as the Income-tax Collections,the importance, significance and effectiveness of tax rationalisation measures aimed at ensuring voluntary compliance and tax deposition by taxpayers as against the coercive tax recovery measures, has been emphasised and encouraged by the Hon'ble Finance Minister.
The objectives of making the amendments in the Finance (No. 2) Bill 2019, as enshrined in the corresponding Explanatory Memorandum are ensuring momentum to the buoyancy in direct taxes through deepening and widening of the tax base, promoting less cash economy, reducing the corporate tax rate for small enterprises, strengthening anti-abuse measures, providing tax incentives, removing difficulties of taxpayers and enhancing the effectiveness of tax administration.
The proposed amendments can broadly beclassified into two categories:
- Tax Incentives Measures aimed at Encouraging Voluntary Compliance by Taxpayers;
- Measures aimed at widening and deepening of tax base, by further tightening of provisions/loose ends.
(I) Tax Incentives Measures aimed at Encouraging Voluntary Compliance by Taxpayers:
(a) Increase in the threshold turnover limit for reduced corporate tax rate of 25% in case of domestic companies from existing Rs. 250 crores to Rs. 400 crores.
The threshold limit of total turnover/ gross receipts, for applicability of reduced tax rate of 25% in case of domestic companies has been increased from existing Rs. 250 crores to Rs. 400 crores. This will cover almost 99.3% of the domestic companies in India. This proposed amendment is indeed a welcome initiative and will definitely provide the much needed boost and encouragement to a very large number of domestic companies in India forming the considerable and sizeable share in the tax deposits. It is a cardinal principle that reduced taxation rates increase voluntary compliances. So, the proposed amendment will surely encourage the domestic companies (constituting about 99.3% of the total taxpayer domestic companies in India) to voluntary comply with all the tax compliances and not resorting to the turnover-splitting tactics, and to pay their applicable taxes at the reduced tax rate of 25%, and thereby contributing to the growth of the Nation.
The date of applicability of the above proposed amendment as stated in the corresponding Explanatory Memorandum is w.e.f. previous year 2017-18. This is interesting as the ITRs for the previous year 2017-18 at the applicable income tax rate in accordance withthe previous threshold limit of Rs 250 crores, have already been filed by the domestic companies and as such it will be a matter of concern as to how this proposed amendment of reduced corporate tax rate is to be implanted from back date i.e. previous year 2017-18. A suitable clarification in this regards is desirable.
(b) Incentives for Start-Ups:
In line with the Government's philosophy of encouraging “Start-ups” in India in order to boost employment generation opportunities, and to encourage the philosophy of self- empowerment, in the amendment proposals, a major and bigger thrust has been given on incentivizing eligible Start-Ups.
In order to resolve the “angel tax” issue, the start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums. The issue of establishing identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department.
In addition, special administrative arrangements shall be made by Central Board of Direct Taxes (CBDT) for pending assessments of start-ups and redressal of their grievances. It will be ensured that no inquiry or verification in such cases can be carried out by the Assessing Officer without obtaining approval of his supervisory officer.
At present, start-ups are not required to justify fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF). The said benefit has been extended to Category-II Alternative Investment Funds also. Therefore, valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny.
Relaxation of conditions for carry forward and set off of losses by Start-ups: In order to facilitate ease of doing business in the case of an eligible start-up, it is proposed to amend section 79 so as to provide that loss incurred in any year prior to the previous year, in the case of closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions stipulated currently at clause (a) or clause (b) of section 79.
In order to incentivise investment in eligible start-ups, it is proposed to amend the said section so as to-
(i) extend the sun set date of transfer of residential property for investment in eligible start-ups from 31st March 2019 to 31st March 2021;
(ii) relax the condition of minimum shareholding of fifty per cent of share capital or voting rights to twenty five per cent.
(iii) relax the condition restricting transfer of new asset being computer or computer software from the current five years to three years.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
(c) Tax incentive for Electric Vehicles :
In line with the Government's intention and objective of phasing out all diesel/petrol vehicles by 2026 and substituting them with Electric Vehicles, with a view to improve environment and to reduce vehicular pollution, the undermentioned amendments have been proposed in the Finance (No. 2) Bill 2019:
(a) It is proposed to insert a new section 80EEB in the Act, so as to provide for a deduction in respect of interest on loan taken for purchase of an electric vehicle from any financial institution up to one lakh fifty thousand rupees subject to the following conditions:
(i) the loan has been sanctioned by a financial institution including a non-banking financial company during the period beginning on the 1st April, 2019 to 31st March, 2023;
(ii) the assessee does not own any other electric vehicle on the date of sanction of loan.
It is also proposed that where a deduction under this section is allowed for any interest, deduction shall not be allowed in respect of such interest under any other provisions of the Act for the same or any other assessment year.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to assessment year 2020-2021 and subsequent assessment years.
(d) Measures for resolution of distressed companies
In line with the Government's consideration of the success of IBC 2016 as a key determinant of economic growth,in continuation with its relaxation provisions being made in the Finance Act, 2018, some more amendments have been proposed in Finance (No. 2) Bill 2019, aimed at facilitating resolution of distressed companies under IBC 2016.
The existing provisions of section 79 are not applicable to a company where any change in shareholding takes place in aprevious year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (IBC) subject to thecondition that jurisdictional Principal Commissioner or Commissioner is provided a reasonable opportunity of being heard. Thus,loss in such cases can be carried forward and set off even if there is change in voting power or shareholding. This benefit isproposed to be extended to certain companies. Thus it has been provided in newly substituted section 79 that the provision of thissection shall not apply to those companies, and their subsidiary and the subsidiary of such subsidiary, where-
(i) the National Company Law Tribunal (NCLT) on a petition moved by the Central Government under section 241 of theCompanies Act, 2013 has suspended the Board of Directors of such company and has appointed new directors, who arenominated by the Central Government, under section 242 of the Companies Act, 2013: and
(ii) a change in shareholding of such company, and its subsidiaries and the subsidiary of such subsidiary, has taken placein a previous year pursuant to a resolution plan approved by NCLT under section 242 of the Companies Act, 2013, afteraffording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.
Further, it is also proposed that under section 115JB of the Act for calculating book profit, the aggregate amount of unabsorbeddepreciation and loss (excluding depreciation) brought forward shall also be allowed to be reduced in cases of the above mentionedcompanies.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21and subsequent assessment years.
(e) Incentives to National Pension System (NPS) Subscribers:
National Pension Scheme is a Central Government-backed savings scheme that aims at building a retirement corpus for the citizens of India. The proposed amendments aimed at incentivizing NPS and their rationale are being discussed as under:
(i) Under the existing provisions of section 10 of the Act, any payment from the NPS Trust to an assessee on closure of his account or on his opting out of the pension scheme, to the extent it does not exceed forty per cent of the total amount payable to him at the time of such closure or on his opting out of the scheme, is exempt from tax. With a view to enable the pensioner to have more disposable funds, it is proposed to amend the said section so as to increase the said exemption from forty per cent. to sixty per cent of the total amount payable to the person at the time of closure or his opting out of the scheme.
(ii) Under the existing provisions of section 80CCD of the Income-tax Act, in respect of any contribution by the Central Government or any other employer to the account of the employee referred to in the section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer, as does not exceed ten per cent of his salary in the previous year. In order to ensure that the Central Government employees get full deduction of the enhanced contribution, it is proposed to increase the limit from ten to fourteen per cent of contribution made by the Central Government to the account of its employee.
(iii) To enable the Central Government employees to have more options of tax saving investments under National Pension System, it is proposed to amend the section 80C so as to provide that any amount paid or deposited by a Central Government employee as a contribution to his Tier-II account of the pension scheme shall be eligible for deduction under the said section.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to assessment year 2020-21 and subsequent assessment years.
(e) Relaxation in the Applicability of Anti-abuse provisions contained in sections 56(2)(x) & 50CA of the Act:
The existing provisions of the section 56(2)(x) of the Income-tax Act, inter alia, provide for chargeability of income in case of receipt of money or specified property for no or inadequate consideration. For determining the amount of income for receipt of certain shares, the fair market value of the shares is taken into account. Similarly, section 50CA provides for deeming of fair market value of unquoted shares for computing the capital gains from the transfer of such shares. For both these provisions, the fair market value is determined based on the prescribed method. Currently, the provisions of section 56(2)(x) are not applicable to certain specified transactions. However, no such exemption is available under section 50CA.
Determination of fair market value based on the prescribed rules may result into genuine hardship in certain cases where the consideration for transfer of shares is approved by certain authorities and the person transferring the share has no control over such determination. In order to provide relief to such types of transactions from the applicability of sections 56(2)(x) and 50CA, it is proposed to amend these sections to empower the Board to prescribe transactions undertaken by certain class of persons to which the provisions of section 56(2)(x) and 50CA shall not be applicable.
However, the prescribed transactions undertaken by certain class of persons to which the provisions of section 56(2)(x) and 50CA shall not be applicable, have not yet been notified by the Board.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
(II) Measures Aimed at Widening & Deepening of Tax Base By Tightening Provisions/Loose Ends:
(a) TDS @ 2% on cash withdrawals in excess of Rs. 1 crore, to discourage cash transactions:
In order to track big cash deposits in banks, an effective provision u/s 285BA requiring the banks & other financial institutions to file an annual information return in cases of all cash deposits of ten lakhs and more in savings account and 50 lakhs or more in current account. However, there was no provision to have prior information and tracking of big cash withdrawals.
Therefore, in order to discourage cash transactions and move towards less cash economy, it is proposed to insert a new section 194N in the Act to provide for levy of TDS at the rate of two per cent on cash payments in excess of one crore rupees in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient.
The objective of the proposed amendment is clearly to obtain prior information through the TDS trail about the financial transactions entailing huge cash withdrawals and thereby keeping a track and control over all such transactions and to ensure that such cash withdrawals don't remain unverified or unscrutinised.
However, it has not been clarified yet as to how and in what manner the credit of the said TDS can be claimed by the assesses, whether it will be treated just like as normal TDS or not?
This amendment will take effect from 1st September, 2019.
(b) Mandatory Filing of ITR in some High Value Transaction cases even if Income is below the threshold exempted slab:
Currently, a person other than a company or a firm is required to furnish the return of income only if his total income exceeds the maximum amount not chargeable to tax, subject to certain exceptions. Therefore, a person entering into certain high value transactions is not necessarily required to furnish his return of income.
In order to ensure that persons who enter into certain high value transactions do furnish their return of income, it is proposed to amend section 139 of the Act so as to provide that a person shall be mandatorily required to file his return of income, if during the previous year, he/she:
(i) has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more current account maintained with a banking company or a co-operative bank; or
(ii) has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for himself or any other person for travel to a foreign country; or
(iii) has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards consumption of electricity; or
(iv) fulfils such other prescribed conditions, as may be prescribed.
Further, currently, a person claiming rollover benefit of exemption from capital gains tax on investment in specified assets like house, bonds etc., is not required to furnish a return of income, if after claim of such rollover benefits, his total income is not more than the maximum amount not chargeable to tax .
In order to make furnishing of return compulsory for such persons, it is proposed to amend the sixth proviso to section 139 of the Act to provide that a person who is claiming such rollover benefits on investment in a house or a bond or other assets, under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB of the Act, shall necessarily be required to furnish a return, if before claim of the rollover benefits, his total income is more than the maximum amount not chargeable to tax.
These amendments will take effect from 1st April, 2020 and will, accordingly apply in relation to assessment year 2020-2021 and subsequent assessment years.
(c) Tax Deduction at Source (TDS) on payment by Individual/HUF to contractors and professionals:
At present there is no liability on an individual or Hindu undivided family (HUF) to deduct tax at source on any payment made to a resident contractor or professional when it is for personal use. Further, if the individual or HUF is carrying on business or profession which is not subjected to audit, there is no obligation to deduct tax at source on such payment to a resident, evenif the payment is for the purpose of business or profession. Due to this exemption, substantial amount by way of payments made by individuals or HUFs in respect of contractual work or for professional service is escaping the levy of TDS, leaving a loophole for possible tax evasion. To plug this loophole, it is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of five per cent. on the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year. However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).
This amendment will take effect from 1st September, 2019.
(d) Inter-changeability of PAN &Aadhaar and mandatory quoting in prescribed transactions.
Existing sub-section (1) of section 139A of the Act, inter alia, provides that every person specified therein, who has not been allotted a PAN, shall apply to the Assessing Officer for allotment of PAN.
It has been observed that in many cases persons entering into high value transactions, such as purchase of foreign currency or huge withdrawal from the banks, do not possess a PAN. In order to keep an audit trail of such transactions, for widening and deepening of the tax base, it is proposed to insert a new clause (vii) in the aforesaid sub-section so as to provide that every person, who intends to enter into certain prescribed transactions and has not been alloted a PAN, shall also apply for allotment of a PAN.
To ensure ease of compliance, it is also proposed to provide for inter-changeability of PAN with the Aadhaar number.
Accordingly the provisions of section 139A are proposed to be amended so as to provide that,-
(i) every person who is required to furnish or intimate or quote his PAN under the Act, and who, has not been allotted a PAN but possesses the Aadhaar number, may furnish or intimate or quote his Aadhaar number in lieu of PAN, and such person shall be allotted a PAN in the prescribed manner;
(ii) every person who has been allotted a PAN, and who has linked his Aadhaar number under section 139AA, may furnish or intimate or quote his Aadhaar number in lieu of a PAN.
Section 139A, inter alia, provides that every person, receiving a document relating to a transaction for which PAN is required to be quoted shall ensure that the PAN has been duly quoted therein. It is proposed to provide that every person receiving such documents shall also ensure that the PAN or the Aadhaar number, as the case may be, has been duly quoted. A new sub-section(6A) is also proposed to be inserted to ensure quoting of PAN or Aadhaar number for entering into prescribed transactions and authentication thereof in the prescribed manner. Duty is also proposed to be cast upon the person receiving any document relating to such transactions, through newly proposed sub-section (6B), to ensure that PAN or Aadhaar number, as the case may be, is duly quoted, and authenticated.
In order to ensure proper compliance of the provisions relating to quoting and authentication of PAN or Aadhaar, the penalty provision contained in section 272B is proposed to be amended suitably.
These amendments will take effect from 1st September, 2019.
(e) Deemed accrual of gift made to a person outside India:
Section 9 of the Act relates to Income deemed to accrue or arise in India. Under the Act, non –residents are taxable in Indian respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or is deemed to be received in India. Under the existing provisions of the Act, a gift of money or property is taxed in the hands of donee, except for certain exemptions provided in clause (x) of sub-section (2) of section 56. It has been reported that gifts are made by persons being residents in India to persons outside India and are claimed to be non-taxable in India as the income does not accrue or arise in India. To ensure that such gifts made by residents to persons outside India are subject to tax, it is proposed to provide that income of the nature referred to in sub-clause (xviia) of clause (24) of section 2, arising from any sum of money paid, or any property situated in India transferred, on or after 5th July, 2019 by a person resident in India to a person outside India shall be deemed to accrue or arise in India. However, the existing provision for exempting gifts as provided in proviso to clause (x) of sub-section (2) of section56 will continue to apply for such gifts deemed to accrue or arise in India. In a treaty situation, the relevant article of applicable DTAA shall continue to apply for such gifts as well.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21and subsequent assessment years.
Concluding Remarks: The proposed amendments in the Finance (No.2) Bill 2019, are a mixed basket of reforms and rationalization measures, some aimed at encouraging voluntary compliance by taxpayers by way of tax incentives while others aimed at widening and deepening of tax base by further tightening loose ends. A Carrot & Stick Approach works well in almost all spheres of life and so does it in Income Tax Reforms, also.
But having said that, amendments/reforms alone are not determinative of their positive or negative nature, and ultimately it's the conduct of the taxpayers as well as the law enforcing agencies/ income tax bureaucracy, which defines as to whether the Exchequer has to act like a satiated elephant or an insatiate trampling elephant. And it goes both ways, from the taxpayers' point of view, they need to realize and understand the significance and importance of their voluntary compliance and due payment of their applicable taxes in satiating the Exchequer/Elephant with mounds of rice only. Similarly, from the revenue authorities' point of view, they also need to understand and appreciate that maximum tax realization happens only by winning the confidence and trust of taxpayers and not by resorting to coercive recovery measures and acting like an insatiate elephant trampling fields.
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