The Budget is out and contains more than the usual number of amendments. There is definitely focus on infrastructure, fiscal discipline and a conscious effort to boost growth and employment. Added to these regular efforts, there are also some welcome efforts to tackle the new age challenges like BEPS, online digital transactions with non residents etc that have been addressed by the FM. While successive finance ministers have been talking about rationalising and simplifying the laws, there does not appear to be any light at the end of the tunnel for this issue. A few quick thoughts on some of the eye catching amendments with regard to Direct Taxes:
1. New Section 115BBDA imposes an additional 10% tax on those assessees who are in receipt of dividends in excess of 10 lakhs. This is in addition to the normal tax on other income. While, the language of the section gives one the impression that once the total dividend receipts exceed 10 lakhs, the entire amount is taxed at 10%, the Memorandum explaining the provisions of the Finance Bill hints that it is only the amount in excess of 10 lakhs that is liable for tax. The memorandum provides that the tax is payable on the gross amount without any deductions. Another aspect that may be considered is whether an assessee who pays tax under this section can claim that section 14A is not applicable to him at all since the dividends are no more part of exempt income in his hands. The department would no doubt argue that dividends continue to be exempt u/s 10 but the assessee is only paying tax at a higher rate. A fresh fertile ground for litigation!
2. The new concessional rate of taxation for Indian resident inventors on Income earned from Patents is really a welcome and bold step. Sec 115BBF provides for a flat 10% tax on income by way of royalties from patents. This is in line with the rates in most of the OECD countries and one can only hope that the rate will be kept stable or reduced in future years and this is not a new avenue of taxation as in the case of dividend distribution and MAT, wherein the rates were progressively increased over the years.
3. A new Equalising Levy has been brought on income earned by the Non residents from residents on account of effecting online sales. The Amazons and Alibabas are going to contribute to Indian treasury now. This is another BEPS related provision that will remain in the statute book for a long time. As the scheme stands now, one can say that it is still in an early stage and would be modified in the coming years based on the experience. The scheme at the moment is not clear whether grossing up of the amount payable for the purpose of levy is required in case the non resident service provider is not willing to accept the reduced amount and the resident Indian businessman is forced to bear the same. Sec 40(a) has been amended as one would expect to provide for the disallowance of the expenditure in case of non deduction.
4. Section 115TD is an interesting addition to the Statute Book. It proposes to tax the accreted income of a charitable trust in case of mergers, dissolution or change of objects. Care has been taken to ensure that the fair market value of the assets on the date of the merger/dissolution/change of form would be considered for arriving at the accreted amount. A simple merger of a trust/section 25 company which is registered u/s 12AA with another entity whose business could be defunct but which has huge assets or a change in its objectives is enough to attract this section. A politically well thought out section!
5. The measure to grant stay of disputed tax on payment of 15% of the demand is one huge relief for the assessees. The constant threat of taking coercive means to recover the disputed amount has been the bane of the tax administration till now and one would like to think that the harassment would come to an end at least now. No one would mind paying 15% of the disputed amount if he is confident of his claims before the appellate authorities.
6. The welcome measure of granting stay has also been accompanied by another provision wherein the assessing authorities are now obliged to give effect to the orders of the appellate authorities within 90 days. This was another regular area of distress for the taxpayers from whom tax would have been recovered using coercive means but the same alacrity is never shown in refunding the same when a favourable order is received from the appellate authorities.
7. The old and familiar demonic Section 271 is in its last year of existence and will be replaced with the new sec 270A. The terms ‘Concealment of income’ and ‘furnishing of inaccurate particulars’ are going to be replaced with the terms ‘under reporting of income’ and ‘misreporting of income’ with differing quantum of penalty. Levy of penalty also appears to be automatic now although the section uses the word “may”. Considering that sec 273B continues to provide protection, the new section is a welcome one inasmuch as it is more benign.
8. The biggest let down is the so called Direct tax Dispute Resolution Scheme. The FM apparently wants to reduce the mountain of pending litigation by doing nothing other than expecting the assessee to silently pay up the tax and interest and withdraw the appeal. To me the scheme appears to be another still born baby like all other Samadhan schemes of earlier days. Unless the government is ready to give up something from its side too, this problem is not going to be resolved. To expect an assessee to pay up the full tax with interest on a genuinely disputed amount appears quite illogical and unfair especially when the FM is ready to accept totally unreported income at 45% cost to the delinquent assessee. A little amount of research would have shown the real cause of cases piling before the appellate authorities. The department loses at least 70% of the cases before the ITAT and the courts indicating that the departmental appeals before the CITs are routinely dismissed forcing the taxpayer to seek redressal before higher authorities. The ideal way would have been to have said that small appeals with a tax effect of say less than 3 to 5 lakhs are deemed to be allowed in favour of the assessee. Simply by giving immunity from penalty is no favour to the assessee.
9. There are other promises held out by the FM notably in respect of some modification to Rule 8D and one hopes that the new formula would be more logical. The need of the hour however is to impress upon the assessing officers not to misuse the provisions of sec 14A and Rule 8D. While the section envisages disallowance of expenses incurred in connection with exempted income from being set off against taxable income, the authorities more often than not use this provision to disallow genuine business expenditure simply because the assessee has earned some exempt income.
There are some hits and misses and a few things that could have been done better in the Bill. But on the whole, the FM needs to be complimented for a sincere and well balanced budget that should hopefully usher in better times for our country
