Finance (no.2) Bill 2019- clause 6 – new exemptions- observations and reservations of author.

[CA DEV KUMAR KOTHARI]

New exemptions and higher exemptions are provided as follows:

Interest on Rupee Denominated Bonds (RDB)- this is in tune with exemption granted vide press release dt.17th September, 2018

interest payable to a nonresident by a unit located in an International Financial Services Centre in respect of monies borrowed by it on or after 1st September, 2019 shall be exempted from tax.

payment from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD. Exemption is increased from 40% to 60%.

Share buy-back – exemption extended to shares of listed companies also. This is an exemption in consequence of taxing the company who buy back its shares and is a company as referred to in section 115QA.

With due respect to the honorable FM. author has strong reservation and resentment about use of words ‘Preventing tax abuse’, as used in budget speech in relation to buy-back of shares. There are cases in which listed companies have bought back shares and have also paid dividend.

Buy-back of shares and payment of dividend are two different aspects of a company having cash reserves. By buy-back of shares, Company reduce outstanding shares so that in future dividend payout is lower and servicing of capital is easy. With reduced shares / share capital even with lower profits dividend can be maintained. So when a company has huge cash balances, on which yield is low, company choose to buy-back shares. There is no tax abuse, because the shareholder will have to pay tax on his income, if any, on buy-back of shares.

Tax on amount of buy-back of shares paid by a company, whether be listed or closely held company is not at all justified. This is because:

the company has not earned any income by resorting to buy-back of shares of its shareholders. In fact in many cases it will be found that company has paid much higher amount on buy-back as against the amount received at the time of issue of shares.

Income, if any, on buy-back of shares will be income of shareholder and not of company.

In many cases there may not be any income in hands of shareholder for the reason that after applying cost inflation index allowable, there will be long-term capital loss. Even in case of short term investments, and shares held as stock-in-trade there can be loss because purchase price can be higher than the price paid on buy-back of shares by company.

By taxing buy-back amount paid by company to its shareholders, it is wrongly presumed that company has earned income, to the extent of amount paid under buy-back of shares which is in excess of amount received on issue of shares by the company.

Taxing buy-back of shares, in hands of company, is therefore not within power to tax income as provided in the Constitution of India (COI). As per COI, the Central Government can impose tax on income. A payment made by company cannot by any stretch of imagination be considered as income of company.

Budget proposal and related notes, explanations and budget speech are reproduced below with highlights, highlighted catch words, underlining, italicizing and coloring , added by author for easy analysis and understanding:

Statutory Provisions

FINANCE (No. 2) BILL, 2019

Amendment of section 10.

6. In section 10 of the Income-tax Act,––

(I) after clause (4B), the following clause shall be inserted, namely:––

“(4C) any income by way of interest payable to a non-resident, not being a company, or to a foreign company, by any Indian company or business trust in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond, as referred to in clause (ia) of sub-section (2) of section 194LC, during the period beginning from the 17th day of September, 2018 and ending on the 31st day of March, 2019;”;

(II) with effect from the 1st day of April, 2020,––

(a) in clause (12A), for the words “forty per cent.”, the words “sixty per cent.” shall be substituted;

(b) in clause (15), after sub-clause (viii), the following sub-clause shall be inserted, namely:-

‘(ix) any income by way of interest payable to a non-resident by a unit located in an International Financial Services Centre in respect of monies borrowed by it on or after the 1st day of September, 2019.

Explanation.-For the purposes of this sub-clause,-

(a) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);

(b) “unit” shall have the meaning assigned to it in clause (zc) of section 2 of the Special Economic Zones Act, 2005(28 of 2005);’;

(III) in clause (34A), the brackets and words “(not being listed on a recognised stock exchange)” shall be omitted with effect from the 5th day of July, 2019.

 Notes:

Clause 6 of the Bill seeks to amend section 10 of the Income tax Act relating to incomes not included in total income.

It is proposed to insert a new clause (4C) in the said section so as to provide for exemption in respect of any income by way of interest payable to a non-resident, not being a company, or to a foreign company, by any Indian company or business trust in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond as referred to in clause (ia) of sub-section (2) of section 194LC issued during the period commencing from the 17th September, 2018 and ending on 31st March, 2019.

This amendment will take effect retrospectively from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent assessment years.

Further, clause (12A) of the said section provides that any payment from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent. of the total amount payable to him at the time of such closure or his opting out of the scheme, shall be exempt from tax.

It is proposed to amend the said section so as to increase the said tax exempt amount from forty per cent. to sixty per cent.

It is proposed to insert sub-clause (ix) in the clause (15) so as to provide that any income by way of interest payable to a nonresident by a unit located in an International Financial Services Centre in respect of monies borrowed by it on or after 1st September, 2019 shall be exempted from tax.

It is further proposed to insert an Explanation to define the expressions “International Financial Services Centre” and “unit”. These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020- 2021 and subsequent assessment years.

Clause (34A) of the said section provides for exemption to any income arising to a shareholder on account of buy-back of shares not being listed on a recognised stock exchange by the company as referred to in section 115QA.

It is proposed to amend the said clause so as to provide the said exemption also to the income arising to a shareholder on account of buy-back of shares listed on a recognised stock exchange by the company as referred to in section 115QA.

This amendment will take effect from 5th July, 2019.

From budget speech:

3.6 Incentive in respect of Rupee-denominated Bond (RDB): In order to contain the current account deficit and augment the foreign exchange inflow, the Government had issued a press release on 17th September, 2018 exempting interest income of non-resident from RDB issued by a company or a business trust, outside India, during the period 17th September, 2018 to 31st March, 2019. It is proposed to incorporate this tax incentive in the Income-tax Act.

6. Preventing tax abuse

6.1 In order to discourage the practice of avoiding Dividend Distribution Tax (DDT) through buy back of shares by listed companies, it is proposed to provide that listed companies shall also be liable to pay additional tax at 20% in case of buy back of share, as is the case currently for unlisted companies.