Weekly Round-up on Tax and Corporate Laws | 13th to 18th January 2025

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from January 13^th to 18^th, 2025, namely:

1. Union Budget 2025: 100+ Recommendations and Expectations relating to Income-tax, GST and Customs;
2. SEBI mandates Mutual funds to disclose ‘Risk-Adjusted Return Information Ratio’ to investors for enhanced transparency;
3. Reduction in share capital of subsidiary & subsequent reduction in shareholding is ‘transfer’ u/s 2(47): SC;
4. Forms GST SPL-01 and GST SPL-02 are available in the GST portal: GSTN Update;
5. CBIC amends the definition of specified premises to link it with actual value of supply of hotels;
6. Sponsorship services provided by the body corporates would be under Forward Charge Mechanism; and
7. Recognition and Accounting of Late Payment Surcharge under Ind AS: Ensuring compliance with Ind AS 115 and Ind AS 109.

1. Union Budget 2025: 100+ Recommendations and Expectations relating to Income-tax, GST and Customs

As the Union Government prepares to present the Union Budget on February 1, 2025, questions arise about how key macroeconomic indicators have evolved since the previous budget on July 23, 2024.

Over this period, the GDP growth rate declined by 1.3%, the Indian rupee depreciated by 3.58% against the US dollar, overall inflation rose by 1.62%, and food inflation climbed by 2.97%. These figures reflect a lag in multiple areas and underscore the need for decisive policy measures.

India’s economy has demonstrated resilience and adaptability for over a decade, yet considerable scope remains to accelerate growth. To reach a 30 trillion-dollar GDP by 2047, the country requires a sustained annual growth rate of approximately 9.5% over the next two decades. Global research by institutions such as the IMF, World Bank, and OECD points to three interlinked policy tools that can help achieve this ambitious goal: (1) reducing the policy rate of interest, (2) maintaining inflation within moderate and predictable limits, and (3) lowering tax rates for businesses and individuals.

Both interest and tax rates have historically shaped these macroeconomic outcomes. Attention now turns to two critical upcoming events: the budget on February 1 and the Reserve Bank of India’s monetary policy meeting in the first week of February.

The budget can address tax rates, while the RBI should reduce interest rates. Easing either or both could inject much-needed liquidity into the economy, stimulating consumption, encouraging capital investment, and helping restore the GDP growth trajectory lost over the previous quarter.

A key measure in the upcoming budget should be rationalising tax rates and introducing clearer, more predictable tax regulations. Within prudent fiscal constraints, lower corporate tax rates often encourage higher business investment in capacity building, research and development, and workforce expansion. Similarly, lowering personal income taxes, provided the tax base remains broad and loopholes are minimised, can put more disposable income in the hands of individuals and stimulate household spending, which accounts for more than half of India’s GDP. International examples from regions such as Dubai and Ireland highlight how well-designed tax reforms can attract multinational corporations, drive investment, and foster robust economic growth.

Another factor the Finance Minister should prioritise is distinguishing between good and bad fiscal deficits. Good deficits generally finance projects that expand a nation’s long-term productive capacity, contributing to sustainable economic growth. Bad deficits, by contrast, result from expenditures and subsidies that do not yield long-term benefits. Curbing these inefficient expenses would free up resources for productive investments, reinforcing the broader aims of tax reforms and fiscal discipline.

Against this backdrop, expectations for the Union Budget 2025 span various economic and legal considerations. This document lists 100+ recommendations focused on tax reforms and proposes amendments to existing tax laws to resolve inconsistencies, clarify regulations, and address taxpayer requirements. By incorporating these changes, the Union Budget 2025–26 could deliver both immediate relief and a long-term growth strategy, positioning India on a more robust and sustainable economic trajectory in the years ahead.

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2. SEBI mandates Mutual funds to disclose ‘Risk-Adjusted Return Information Ratio’ to investors for enhanced transparency

In a move to make mutual fund investments more transparent and investor-friendly, the Securities and Exchange Board of India (SEBI) vide Circular Dated January 17, 2025, has mandated the disclosure of Risk-Adjusted Return (RAR) for mutual fund schemes, specifically for equity-oriented schemes. This mandate aims to provide investors with a clearer understanding of how mutual fund schemes perform, not just in terms of returns but also by considering the risk involved.

The key metric introduced is the Information Ratio (IR), which helps investors evaluate how efficiently a scheme generates returns relative to the risk it undertakes. This simple yet powerful measure allows investors to compare schemes more effectively and make informed financial decisions.

2.1 What is the Information Ratio (IR)?

The Information Ratio (IR) is an established financial ratio used to measure the RAR of any scheme portfolio. It is widely recognized for assessing the risk-adjusted returns of a portfolio. It is a critical measure for evaluating the performance of mutual fund schemes. The IR not only accounts for the returns but also incorporates the risk or volatility associated with those returns. In simple terms, the IR helps investors determine how much return a scheme has generated per unit of risk undertaken.

The formula for calculating IR is as follows:

IR = (Portfolio Rate of Returns – Benchmark Rate of Returns) / Standard Deviation of Excess Return

Where:

• Portfolio Return refers to the total gain or loss generated by an investment portfolio over a specific period.
• Benchmark used in the above formula shall be the Tier 1 benchmark currently used by the equity oriented Mutual Fund schemes.
• Excess Return is the difference between the Portfolio Return and Benchmark Return.
• Standard Deviation of Excess Return is calculated using daily return values.

The IR provides valuable insight into the consistency of a scheme’s returns relative to its benchmark.

2.2 Evaluating Mutual Fund Performance through Example

Let’s consider two equity-oriented mutual fund schemes, Scheme A and Scheme B. Both schemes have delivered a return of 12% over the past year, but their risks (volatility) differ significantly.

• Scheme A has a Standard Deviation of 8%, indicating relatively stable returns.
• Scheme B has a Standard Deviation of 15%, reflecting higher volatility and greater risk in achieving the same 12% return.

If the Tier 1 benchmark for both schemes had a return of 8% during the same period, the Information Ratios for both the schemes would be calculated as follows:

For Scheme A:

Excess Return = 12% − 8% = 4%

IR= 4%/8% = 0.5

For Scheme B:

Excess Return=12%−8%=4%

IR= 4%/15%= 0.27

Despite both schemes generating the same return, Scheme A’s higher IR indicates that it has generated the return with less risk compared to Scheme B, making it a more efficient performer on a risk-adjusted basis.

2.3 Disclosure of Information Ratio

Mutual Funds/AMCs must disclose the Information Ratio (IR) of a scheme portfolio on their website daily, along with performance disclosures. Additionally, the Association of Mutual Funds in India (AMFI) must ensure that such disclosures are available on its website in a comparable, downloadable (spreadsheet), and machine-readable format. This IR disclosure requirement applies only to equity-oriented schemes.

2.4 Why is IR Important for Investors?

The volatility of returns is a key consideration when evaluating the suitability of a mutual fund scheme. While high returns are desirable, they must be assessed alongside the level of risk involved. The IR provides a clearer picture by demonstrating how efficiently a scheme generates returns relative to the risk undertaken, empowering investors to make more informed decisions.

2.5 Format for Disclosure

AMCs must disclose the IR in a specific format as SEBI outlines. This format will be made available on the SEBI website, and AMCs must provide a hyperlink to the AMFI website, where a detailed explanation of the IR will be accessible. The explanation will include the formula for calculating IR, guidance on interpreting the IR and illustrations to help investors understand the metric better.

2.6 Conclusion

The mandatory disclosure of the Information Ratio (IR) marks a significant step towards enhancing transparency in the mutual fund industry. By incorporating this metric, SEBI aims to equip investors with the tools necessary to make more informed decisions by factoring in returns and risk. The IR enables investors to assess how mutual funds perform relative to the risk they undertake, ultimately helping them select schemes that align with their risk tolerance and investment objectives.

Read the Circular

3. Reduction in share capital of subsidiary & subsequent reduction in shareholding is ‘transfer’ u/s 2(47): SC

The assessee held shares in an Indian company. The company filed a petition before the High Court for a reduction of its share capital to set off the loss against the paid-up equity share capital. The High Court ordered for a reduction in the share capital of the company. The assessee’s share was reduced proportionately, and the company paid an amount to the assessee as consideration. During the year, the assessee claimed a long-term capital loss accrued on the reduction in share capital from the sale of shares of such company.

However, the Assessing Officer (AO) contended that although the number of shares got reduced by virtue of reduction in share capital of the company, yet the face value of each share as well as shareholding pattern remained the same. Thus, reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in section 2(47).

The matter reached before the Supreme Court.

The Supreme Court held that section 2(47) is an inclusive definition, providing that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While the taxpayer continues to remain a shareholder of the company even with the reduction of share capital, it could not be accepted that there was no extinguishment of any part of his right as a shareholder qua the company.

The expression ‘extinguishment of any right therein’ is of wide import. It covers every possible transaction that results in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights, qualitative or quantitative, which the assessee has in a capital asset, whether such asset is corporeal or incorporeal.

In the instant case, the face value per share remained the same before the reduction of share capital and after the reduction of share capital. However, as the total number of shares were reduced.

Relying upon the decision in case of Kartikeya V. Sarabhai v. Commissioner of Income Tax reported in (1997) 7 SCC 524, it was held that reduction of right in a capital asset would amount to ‘transfer’ under section 2(47). Sale is only one of the modes of transfer envisaged by section 2(47). Relinquishment of any rights in it, which may not amount to sale, can also be considered as transfer and any profit or gain which arises from the transfer of such capital asset is taxable under section 45.

Also, a company under section 66 of the Companies Act, 2013 has a right to reduce the share capital, and one of the modes which could be adopted is to reduce the face value of the preference share. When as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such a reduction of the right of the capital asset clearly amounts to a transfer within the meaning of section 2(47).

Thus, it was held that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the assessee would be squarely covered within the ambit of the expression ‘sale, exchange or relinquishment of the asset’ used in section 2(47).

Read the Ruling

4. Forms GST SPL-01 and GST SPL-02 are available in the GST portal: GSTN Update

The GSTN has issued an update to inform that both Forms GST SPL 01 and GST SPL 02 are available in the GST portal, and taxpayers are advised to file applications under the waiver scheme. However, for the appeal applications (APL 01) filed before 21.03.2023, the withdrawal option is not available in the GST portal.

For such cases, the taxpayers are advised to submit their request for withdrawal of appeal applications to the concerned Appellate Authority. To meet the eligibility conditions, taxpayers must withdraw appeal applications (Form APL-01) related to the relevant demand. In this regard, the GSTN Update dated January 14th, 2025, has been issued.

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5. CBIC amends the definition of specified premises to link it with actual value of supply of hotels

In some cases, the hotel provides accommodation services along with restaurant services, leading to ambiguities regarding the applicable rate for restaurant services in hotel premises. Under GST, restaurant services are taxed either at 18% with ITC or 5% without ITC. However, this benefit of opting for preferential rates was not extended to the restaurants operating within hotels. Furthermore, when the actual value of hotel accommodation was less than the declared tariff, the restaurants were required to pay higher taxes due to higher declared tariffs, causing challenges.

Now, the CBIC has issued the notification to amend the definition of specified premises (from the services rate and exemption notifications) to link it with the actual value of supply of any unit of accommodation provided by the hotel and to make the rate of GST applicable on restaurant services in such hotels, for a given financial year, dependent upon the ‘value of supply’ of units of accommodation made in the preceding financial year. In this regard, Notification No. 05/2025-Central Tax (Rate) dated 16th January, 2025 has been issued.

Read the Notification

6. Sponsorship services provided by the body corporates would be under Forward Charge Mechanism: Notification

Under GST law, sponsorship services provided by ‘any person’ to a body corporate or partnership firm (including Limited Liability Partnership) located in the taxable territory are liable to tax on a reverse charge basis (RCM). Now, the CBIC has issued a notification to amend Notification No. 13/2017-Central Tax (Rate), and sponsorship services provided by the body corporates would be under the Forward Charge Mechanism.

Also, the taxpayers registered under the composition levy scheme are excluded from paying GST under RCM on renting any commercial/ immovable property (other than a residential dwelling). In this regard, Notification No. 07/2025-Central Tax (Rate) dated 16th January 2025 has been issued.

Read the Notification

7. Recognition and Accounting of Late Payment Surcharge under Ind AS: Ensuring compliance with Ind AS 115 and Ind AS 109

Late Payment Surcharge (LPSC) is a common financial component in industries such as power transmission and utilities, where delayed payments under contractual agreements often lead to significant financial implications. Its recognition and accounting require careful alignment with Indian Accounting Standards (Ind AS), particularly Ind AS 115 and Ind AS 109, to ensure financial accuracy and regulatory compliance. LPSC, being a variable consideration, is directly linked to the terms of the contract and the performance obligations under it. Recognizing such revenue involves evaluating whether payment terms are clearly defined, the contract has been approved, and the collectability of consideration is probable. When these conditions are met, revenue can be recognized even if the payment itself is delayed.

A critical aspect of accounting for LPSC lies in identifying whether it includes a significant financing component due to the timing difference between the satisfaction of performance obligations and the receipt of payments. If such a component exists, it must be separately accounted for as interest income, distinguishing it from revenue derived directly from the contract’s primary obligations. This separation ensures that the financial statements provide a true and fair view of income sources. Additionally, as receivables from LPSC are financial assets, they must undergo impairment testing using the Expected Credit Loss (ECL) model under Ind AS 109. The ECL model helps in assessing the credit risk associated with the receivables by considering past events, current conditions, and future economic forecasts, ensuring that potential risks are adequately represented in the financial statements.

For instance, in the case of a power transmission utility operating under a regulated framework, LPSC accrued from delayed payments by distribution companies highlighted the challenges of revenue recognition. Initially, the utility recognized income only to the extent of tax deducted at source (TDS), which led to auditor and regulatory concerns over understatement of income. Upon review, it was concluded that LPSC should be recognized on an accrual basis when collectability is reasonably assured, irrespective of the payment delays. Further, any financing component embedded within the LPSC was accounted for separately as interest income. The receivables were then subjected to periodic impairment testing using the ECL model, ensuring accurate representation of the credit risks involved.

This interconnected approach to recognizing and accounting for LPSC emphasizes the importance of compliance with Ind AS 115 and 109. It not only ensures that revenue and related components are reported accurately but also enhances financial transparency and reliability. The case study exemplifies how a systematic alignment of accounting policies with regulatory standards can address complex revenue streams effectively, serving as a guiding framework for entities managing similar financial challenges.

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