Every year the Finance Bill contains plethora of amendments to income-tax law. Every change is not appreciated or welcomed by the taxpayers due to the obvious reason being that most of the amendments are intended to set right a lacuna /loophole in the legal provisions exploited by the taxpayers or the taxpayers view point / interpretation approved or upheld by the appellate authorities. It is a natural process that the legal provisions warrant changes in order to address the new challenges that may arise due to evolution of scientific inventions and business practices for example the recent focus on taxation of e-commerce transactions which transcend national and geographical barriers.
In fact, one of the recent thought processes of the intellectual community which was engaged in finding out a solution for cross border transactions was, to have a uniform law for taxation of international transactions across the globe. It may not be a figment of imagination if nations in pursuit of economic development in order to protect their economic interests yield to such idea for taxation of international transactions in a single regulatory legislation.
The present Union Government has been taking host of economic reforms in very quick intervals to flourish the growth for achieving 5 trillion USD as its GDP in the next few years. One of the remarkable changes among the educated lot of the society across the country in the recent times is the awareness on Indian economy. To put it in lighter vein, it can be said after the demonetization and introduction of GST, every person talks about Indian and global economic scenario besides GDP and the growth trajectories. This refresher takes snapshot of certain reforms in domestic income-tax law which could be made in the ensuing Budget, 2020 so that the statute becomes simple and user friendly.
1. De-recognise the status of HUF: One of the apparent gaps or loopholes used by the personal taxpayers in India is the claim of the status of HUF. It is a fact that in the last decade or so, many of the individual taxpayers engaged in business have two PANs of which one is meant for individual status and another as HUF. There is no proper verification mechanism in place with the tax administration before issuing PAN cards for HUF status. Though it is agreed that the status of Hindu Undivided Family is the outcome of social practice and the Hindu laws which have been codified and followed by the society at large, in the recent times there is rampant abuse of this privilege by the taxpayers. Just like de-recognizing partial partition of HUF for the purpose of income-tax, a limited de-recognition of HUF status for the purpose of income-tax may be thought of and the income of HUF could be clubbed with the personal income of Karta for determination of tax liability. If such move is adopted, we could see a discernible drop in the admission of HUF income by the taxpayers and that would confirm post such amendment, how this privilege has been misused or abused, so far.
2. Rationalisation of cash expenditures : The Budget, 2020 can draw some leaf out of the GST collections as regards levy of penalty for infraction / contravention of legal provisions. For example, when cash payment is made beyond Rs.10,000 the expenditure is liable for disallowance at 100%. Since the auditors who audit under section 44AB are not able to verify for sure such contraventions, resort to providing disclaimers in the report wherever it is necessary. It would not be a retrograde or regressive measure if the taxpayers are asked to file a self declaration of the number of times there was contravention of section 40A(3) and is mandated to pay 2% of such aggregate contraventions as "fee" separately without meddling with computation of income of the taxpayers. This will put the onus on the taxpayers to declare and pay 2% of such contraventions when the expenditures are a genuine expenditure or outgo. In the case of bogus expenditure, claims when not supported by confirmation / vouchers/bills, it can be subjected to tax as is presently in vogue.
3. Penalties for cash transactions: There are three legal provisions viz. (i) section 269SS; (ii) section 269T; and (iii) and section 269ST in the statute book to act as deterrent measures against acceptance of money by way of loan or deposit or other transactions exceeding the prescribed monetary limit. In spite of the Government mandating cashless transactions among the public, there are still contraventions taking place in many cases. The legal consequence is levy of penalty equal to the amount of contravention. The legal provision could be amended to provide a penalty at 10% of the amount so received in contravention of the above said legal provisions without providing any leeway for providing immunity from penalty. This would make the taxpayers to understand the monetary consequence of transactions by way of automatic penalty and the certainty in levy of penalty will act as a deterrent for not repeating the same in future.
4. Relaxation for delayed returns filed by co-operative societies: In the case of co-operative societies whose accounts are audited by the respective State Government authorities there are delays in filing their income tax returns. The deduction under section 80-P is not allowable to co-operative societies when the return is filed beyond the due date specified in section 139(1) and this is due to the mandate given in section 80AC. It may be worth noting that the denial of deduction under section 80-P cannot be resorted to by the CPC under section 143(1) since the scope for adjustments contained in section 143(1) does not make reference to section 80-AC or section 80-P.
A benevolent circular or a retrospective amendment may be inserted in section 80-P for allowance of deduction for the assessment years 2018-19 and 2019-20. The Finance Act, 2018 substituted section 80AC from the assessment year 2018-19 and many taxpayers unaware of the change are now in quandary.
5. Penalty for delay in tax audit reports: The income-tax return filing exercise is a challenge when the books of account are to be audited under the income-tax law. There are various provisions which mandate auditing the books of account and to mention a few, tax audit under section 44AB, audit of charitable trusts and institutions under section 12A and audit in respect of transfer pricing and international transactions.
Failure to obtain tax audit report under section 44AB attracts penalty under section 271B @ 0.5% of the turnover or gross receipt but limited to Rs.1,50,000. This penalty provision is hardly invoked in the recent times. The government may think of rationalizing the provision by prescribing penalty based on the number of days of delay in filing the tax audit report instead of the fixed amount or percentage presently contained in the Act.
This would pave the way for the taxpayers to file the return either within time or pay penalty commensurate to the number of days of delay. The discretion vested for non-levy of penalty contained in section 273A could also be omitted.
6. Monetary limit for applying transfer pricing provisions: The provisions relating to transfer pricing for determination of arm's length price between associated enterprises presently addresses only the purchase of goods. It does not address sale of goods and services. For example, a company in India may derive more than 90% of its gross receipts by rendering service to an unrelated company outside India. If it is a case of purchase of goods from a company outside India, it will become a deemed associated enterprise. Whereas when the Indian company makes sale or render service to foreign company there is no reference to the percentage of gross receipts of the resident entity for determination of arm's length price.
The foreign company may be obligated to furnish details to the Indian associate and to Indian tax authorities, to ensure that the transactions are carried out at the arm's length price. In other words, if the billing of the resident entity is below the ALP there is no tax consequence in the absence of the foreign entity furnishing details of comparable transactions made by it during the same time.
7. Deleting prosecution provisions: The prosecution provisions contained in the Income-tax Act are so alarming that a layman would be afraid if he reads those provisions. The Income-tax law can provide definite penalty provisions and minimize the prosecution provisions as they have remained in the statute book only to bully the taxpayers and have not been implemented in majority of the cases. A scenario of mandatory penalty levy with very minimal exceptions for waiver is adequate enough to seek compliance from the taxpayers instead of having draconian prosecution provisions in the statute book when they are sparingly used.
8. Computation of fair market value for exit tax in the case of charitable trusts and institutions: Presently, the law is silent as regards cancellation of registration under section 12AA by the tax authorities on retrospective basis. The dispute relating to reputed Tata group of companies as regards the power of tax authorities to cancel registration on retrospective basis will throw some light on this issue. A clarificatory amendment (would be applicable on retrospective basis) could be thought of, to ensure that the tax authorities are either vested or not empowered to do such cancellation of registration on retrospective basis.
Section 115TD seeks computation of the accreted income which is chargeable to tax at the maximum marginal rate. Rule 17CB provides the methodology for determination of the accreted income. It says that the aggregate fair market value of the total assets of the trust or institution, shall be the aggregate of the fair market value of all assets in the balance sheet as reduced by (i) any amount of income-tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of income-tax claimed as refund under the Act; and (ii) any amount shown as asset including the unamortized amount of deferred expenditure which does not represent the value of any asset.
On reading the rule 17CB(1) given above, it is amusing to note that the fair market value of all the assets when considered in the first instance, where is the need for reducing the amount of income tax paid (excluding the amount of refund claimed). When all the assets have been valued at fair market value any income-tax refund due (as claimed by the assessee) must also be added to arrive at the FMV of the assets. This reduction of advance tax paid from the fair market value of assets seems to be confusing.
9. Deemed tax deduction as per second proviso to section 40(a)(ia): The Finance Act, 2012 provided the much needed relief from disallowance of expenditure on which tax was not deducted at source if the payee has admitted the income and furnished the return of income. A close reading of the further proviso says "it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee". If the payee has filed the return which would obviously be after the end of the previous year, the payer will be deemed to have deducted the amount and paid the amount on the date of furnishing of return of income by the payee. When the deduction (of tax at source) is after the end of the previous year, the disallowance under section 40(a)(ia) cannot be avoided for that assessment year.
For example, for the financial year 2019-20 if tax is not deducted on rent of Rs.5 lakhs paid by a company to a resident individual and the payee (resident individual) has filed the return by admitting the rental income in April, 2020 the payer is deemed to have deducted and paid the tax in April, 2020. Thus the tax deduction is after 31st March, 2020 and hence the disallowance @ 30% for the assessment year 2020-21 (previous year 2019-20) cannot be avoided. The said 30% disallowed in assessment year 2020-21 would become allowable in assessment year 2021-22.
The round up of expectations from Budget, 2020 pertaining to Income-tax Act, 1961 are from the perspective of taxpayers in general and more so the tax professionals in particular. The intricate observations of the legal provisions given above may not be applicable to general taxpayers such as salaried and pensioners. The amendments to Income-tax Act require explanations to justify the amendments made so that the amendments are understood by all the stakeholders. In the recent times, the changes explained in the memorandum are so cryptic that the rationale of the amendment could not be understood. Example could be the deletion of the word "resident" in the further proviso to section 40(a)(ia) by the Finance Act, 2019.