Income Tax 21 Jan,2020
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The ‘Bucket-List’ of a ‘BUSINESS’ from the Union Budget 2020!!
Mayank MohankaFCA

Hi Friends!!

I am 'Business'.

In India, I exist in different forms and structures. I may be carried out by a proprietory concern, a partnership firm, LLP or a corporate entity. I can act as the critical catalytic who can play a vital and crucial role in accelerating the growth rate in the current sluggish economy. I have the potential for the much-needed revival of the slowing economy by making investments in core infrastructure facilities and sectors and generating substantial employment opportunities and thereby increasing the per capita income of the end consumers to augment the much-needed consumption.

If given a conducive and friendly environment to flourish, I have the capacity and the capability to do all this, on my own. But now, as they say, 'Milk' also requires the help of 'Complan' to increase its nutritive power, similarly I also require the assistance and support of the Government and the Finance Ministry in the upcoming Union Budget 2020, so as to give me the requisite push and fillip.

Our FM Smt. Nirmala Sitharaman has been kind, generous, sensitive and responsive enough to seek the feedbacks and suggestions for the upcoming Union Budget 2020, from all the stakeholders concerned.

So, being one of the biggest stakeholders, I am sharing below, my 'bucket-list' or 'wish-list' for the upcoming Union Budget 2020, in my various forms. Hope, the Finance Minister is listening….

(I) Corporate Business Entities:

(i) Relaxation in the provisions of newly inserted section 115BAA and 115BAB concerning restrictions on the availment of specified deductions and allowances for reduced corporate tax rate of 22% / 15%, respectively.

The Taxation Laws (Amendment) Act 2019, has brought good news for me, by way of introduction of two new sections viz. section 115BAA and section 115BAB providing for reduced taxation regimes, whereby corporate tax rates have been reduced to 15% and 22% in case of newly incorporated domestic manufacturing companies and non-manufacturing companies, respectively w.e.f. 1.10.2019.

Under the newly inserted section 115BAA, a domestic company has an option to pay tax at the reduced rate of 22% provided it does not claim specified deductions, allowances and brought forward MAT credit and unabsorbed accelerated/additional depreciation.

Thus, a domestic corporate entity has to do a trade-off between the reduced tax rate of 22% vis-à-vis the availment of specified deductions, allowances and brought-forward MAT credit and unabsorbed accelerated/additional depreciation, which in a way is diluting the benefit of reduced tax rate.

So, it is my wish and request that this conditional benefit of the reduced tax rate, should be relaxed and the domestic corporate entity opting for the reduced tax rate of 22%, should be allowed to adjust its unabsorbed business losses on account of unabsorbed additional depreciation and the MAT credit, if any, from its income of the previous year, in which the option of reduced tax rate has been exercised. Such restrictions concerning the non-availment of specified deductions, allowances and brought-forward MAT credit and unabsorbed accelerated/additional depreciation may be imposed for subsequent assessment years.

Further, it is my desire and wish that the scope of section 115BAB of the Income Tax Act, providing for the reduced tax rate of 15% in case of newly incorporated domestic manufacturing companies w.e.f. 1.10.2019, may be enlarged so as to include the job-work and ancillary activities also within the purview of manufacturing activities so as to qualify for the reduced tax rate.

(ii) Scrapping of Dividend Distribution Tax:

At present the corporate entities are subject to the levy of Dividend Distribution Tax (DDT) @ 15% plus applicable surcharge u/s 115O of the Act, on the dividends being paid by them to the shareholders.

It will not be wrong to say that the current provisions concerning the levy of tax on dividend income are resulting in taxation at four levels viz.

(a)  firstly, as regular corporate income tax on corporate profits;

(b)  secondly, as DDT in the hands of corporate entities;

(c)  thirdly, as tax on dividends in the hands of recipients u/s115BBDA, if the dividend income exceeds Rs. 10,00,000/- p.a.;

(d)  fourthly, as disallowance u/s 14A w.r.t. dividend income.

Thus, there is an urgent and dire need to eliminate this unjustified cascading of taxes and the scrapping of DDT in the hands of corporate entities.

(iii) Start-ups:

With a view to encourage and promote 'my nascent stage' more popularly known as 'Start-ups', a slew of amendments were being made in the previous Budgets. However, there is a need to further rationalise and streamline the legislative provisions as under:

(a) Angel Tax: Non-applicability of the provisions of section 56(2)(viib)/56(2)(x) on Eligible Start-ups u/s 80IAC of the Act:

The CBDT as per its Circular No. 22/2019 dated 30.8.2019, has stipulated the specified procedure in ongoing assessments of 'eligible start-ups' whose cases are under limited scrutiny on the single issue of applicability of section 56(2)(viib) and has provided that the contentions of such 'start-ups' in this regard, shall be summarily accepted.

However, in order to avoid any uncertainty and confusion in this regards, an express and specific amendment in section 56(2)(viib)/56(2)(x) of the Act, concerning the non-applicability of the provisions of these sections to the eligible start-up entities u/s 80IAC of the Act, is desired and required.

(b) Relaxation in the provisions of Section 79 concerning carry-forward and set-off of losses:

The Finance Act 2017 has amended section 79 to provide that in the cases of eligible start-ups u/s 80IAC of the Act, where a change in shareholding has taken place in a previous year, loss shall be allowed to be carried forward and set-off against the income of such previous year, only if all the shareholders of such company carrying voting rights, on the last day of the year in which the loss was incurred, continue to hold those shares on the last day of such previous year. This condition of continuity of the shareholding is causing practical difficulties for the 'start-ups' as PE investors in the 'start-ups' generally look at the time frame of 3-5 years for exit at a higher price. So, any such exit will trigger section 79 limitation, for the 'start-up'.

In view of the practical difficulties and realistic considerations, this condition of continuity of 100% shareholding of the promoters/investors of the 'start-ups' u/s 79 may be relaxed and instead an appropriate percentage say 20% or 25% may be specified, for operational flexibility.

(iv) Stressed/Insolvent Companies under Insolvency & Bankruptcy Code (IBC) 2016:

As per our conditioning, we naturally take extra care of those body parts in our human body, which have become sick. Similarly, in my case also, those stressed/insolvent companies under IBC 2016, wherein resolution plans for my revival are under consideration by NCLT, extra care, concern and more responsive and sensitive approach is desired by the Law-makers.

(a) Suitable Amendment to ensure Non-Applicability of the provisions of section 56(2)(x) & 50CA to the insolvent companies whose resolution plans for their revival have been approved by NCLT under IBC Act 2016:

The repealing of the erstwhile SICA Act and its substitution with the new Insolvency & Bankruptcy Code (IBC) 2016, is being considered as a path-breaking initiative of the Central Government. The new IBC Act 2016 is more holistic and sensitive in its approach to ensure more effective financial revival of the insolvent companies as well as protecting the interests of all stakeholders & financial & operational creditors.

Thus, it becomes all the more important and crucial to incentivize and boost the potential buyers/bidders to encourage them to come out with effective resolution plans under IBC. However, potential buyers/bidders desirous of acquiring insolvent companies face the bottlenecks of tax authorities challenging the valuation aspects of the acquisition under section 50CA and 56(2)(x) of the Income Tax Act.

Under Sections 50CA and 56(2)(x) of the Income Tax Act, the differential between the fair market value and the bidding consideration is taxable if the bidding consideration is lower than the fair market value. Section 50CA imposes a tax on this notional capital gain income on the seller and Section 56(2)(x) imposes a tax on the buyer by treating the difference as income from other sources.

The FMV of the securities has to be calculated as per the Rule 11UA of the Income Tax Rules, 1962 with book value or stock market prices to be taken into account. There may be situations, where the bid price of these securities is lower than the FMV determined under Rule 11UA. Since these transactions of bidding are being undertaken in the open market through a competitive bidding process, it would be grossly unfair to tax the sellers and buyers on this notional income.

Since the government has identified the success of IBC as a key determinant of economic growth, it is therefore imperative for the concerned finance ministry and revenue authorities to have a more compassionate and rational view as far as taxing such strategic acquisitions of insolvent companies under IBC.

Thus, in order to augment the success of such a noble initiative of IBC 2016, suitable amendments in section 56(2)(x) & 50CA are requested to be made in the upcoming Finance Bill 2020, so as to make them inapplicable on such insolvent companies whose resolution plans for their financial revival have been approved by NCLT under IBC Act 2016.

(b) Amendment in sections 28(iv) & 41(1) to ensure non taxability of the waiver of loans/liabilities of the insolvent companies under IBC Act 2016:

The waiver of loans and liabilities of the insolvent companies by the financial and operational creditors form an integral part of all the resolution plans aimed at financial revival of insolvent companies under IBC 2016.

Recently the Hon'ble Supreme Court in the case of Mahindra and Mahindra Ltd. [2018] 93 taxmann.com 32 (SC), has laid down the law that waiver of loan shall not be taxable either u/s 28(iv) or s.41(1).

The Apex court has now clarified that 'waiver of loan' should be treated as 'receipt of money' and hence such receipt of money would fall outside the purview of s.28(iv) and accordingly cannot be taxable.

The Apex Court has also held that 'waiver of loan' does not amount to cessation of trading liability and as such the same would not fall within the purview of s.41(1).

Therefore, in view of the binding nature of the above judgement of the Hon'ble Supreme Court and more importantly in order to provide the much needed boost and push to IBC 2016 aimed at ensuring financial revival of insolvent companies, suitable amendments in section 28(iv) and 41(1) of the Income Tax Act are requested to be made so as to ensure their non-applicability to the waiver of loans and liabilities of insolvent companies under IBC 2016.

Similar amendments are requested to be made under MAT provision u/s 115JB so as to ensure non-inclusion of such waiver of loans and liabilities in book profits of insolvent companies under IBC, for the purpose of MAT determination.

(c) Relaxation in provisions of section 2(1B), 2(19AA) & 72A of the Act concerning allowability of carry forward and setoff of losses and unabsorbed depreciation in case ofinsolvent companies under IBC Act 2016:

In making strategic acquisitions of insolvent companies under IBC 2016, the consideration of income tax benefit of availment of set-off benefit towards brought-forward business losses and unabsorbed depreciation of insolvent companies plays a very significant role in luring the potential bidders/buyers and it is a universal phenomenon in almost all strategic business acquisitions under IBC 2016.

The conditions for availing the benefit of set-off towards brought-forward business losses and unabsorbed depreciation of the amalgamating/demerging entity is stipulated in section 72A of the Act within the meaning of section 2(1B) or 2(19AA) of the Act.

The primary conditions as envisaged in section 72A are that atleast 75% of the shareholders of the amalgamating/demerging entity must be given shareholding in the amalgamated/demerged entity, amalgamated/demerged company must hold at least 75% of the book value of fixed assets of the amalgamating/demerging entity for a minimum period of five years from the date of amalgamation/demerger; and that the new entity must continue the business of the stressed company for a minimum period of five years from the date of amalgamation/demerger. If either of the conditions is not met, the tax benefit of loss and depreciation is to be taxed in the year the condition is breached.

All these conditions, may in a certain type of resolution plans, be difficult to comply with. Plans which require significant divestment of fixed assets for reasons of business viability may be hit by this embargo. The limitation on the continuation of the old business after amalgamation hampers the flexibility of the acquirer to bring about a turnaround by restructuring the old business into a new business which is viable. In such situations, acquirers/bidders would be hampered by not being able to take the amalgamation route.

In view of above, suitable relaxations in section 2(1B), 2(19AA) and section 72A of the Act are requested to be made in the upcoming Finance Bill 2020, so as to make them inapplicable on insolvent companies under IBC 2016, so as to encourage more potential buyers and bidders to participate in the resolution plans for ensuring the financial revival of such insolvent companies.

(v)Incorporating time bound limitation period for issuing income tax refunds in the Income Tax Act:

Delay in processing of income tax refunds of assessees and business enterprises has become a recurring and universal phenomenon. In order to meet out the budgetary targets of demand, refunds are being withheld for no justifiable reasons. Currently apart from the nominal compensatory interest for delay in refund, there is no other provision in the Income Tax Act stipulating any limitation period for issuing refunds. In view of the Governments' objective of ensuring "ease of doing business" and the CBDT's goal of ensuring taxpayer friendly regime, suitable provisions must be incorporated in the Income Tax Act itself to incorporate time bound limitation periods for issuing refunds and fixing accountability for delays beyond that limitation period.

(II) Partnership Firms/LLPs:

In India, apart from corporate entities, I am being carried out by other forms of organisations/entities also like partnership firms and Limited Liability Partnerships (LLPs).

There should not be any discrimination on the basis of my form and structure and as such the benefit of reduced tax rate of 15% and 22%, available only to corporate entities at present, should also be extended to my all other forms and structures including partnership firms and LLPs.

(III) Proprietory Concerns:

It is a fundamental principle of economy that for revival of slowing economy, increase in personal consumption levels is a sine-qua-non. For increasing consumption levels, increase in personal disposable income is essential.

Therefore, there is a need to reduce the personal income-tax rates and also an increase in the basic exemption threshold limit in case of individuals and proprietory concerns undertaking me, to put back the wheels of our economy on track.

Concluding Remarks:

Obviously, all the above proposed relaxations and rationalisation measures will result in increased Fiscal Deficit but in view of the present scenario, a little bit of loosening on the fiscal deficit front, for the revival and growth of the economy has become an unavoidable compulsion, and the concerned lawmakers have to live with it.

Before parting, just wish to convey the Law-makers and the Law-enforcing Agencies that,

"Focus and work on 'making me Easy' and not 'making me Busy in unproductive litigations and disputes'."