PRE-BUDGET MEMORANDUM - 2018 DIRECT TAXES AND INTERNATIONAL TAX By: THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA, NEW DELHI

Sr. No.

Suggestion

PART A

Suggestions relating to the policy & provisions of Income-Tax Act, 1961

CHAPTER I

PRELIMINARY

1.

Increase in the rate of surcharge increases cost of doing business for domestic companies

2.

Section 2(15) – Need for defining “Yoga”

3.

Section 2(15) – Substitution of existing provisos with new proviso requiring satisfaction of two new conditions for qualifying as a “charitable purpose”

4.

Mandatory application of income by charitable trusts/ institutions under section 10(23C)

5.

Clarification regarding exemption of interest on deposits by cooperative societies with multi-State co-operative banks

6.

Section 2(42A) – Reduction in holding period in case of immovable property, being land or building or both, to qualify as long term capital asset – Consequential amendments to be made in sections 54, 54B, 54D and 54F

7.

Section 2(42A), section 47(xb) and section 49(2AE) - Tax neutral conversion of preference shares to equity shares – Clarification regarding tax treatment for earlier years

8.

Section 3- Definition of Previous year

9.

Place of Effective Management provisions – section 6 (3)

CHAPTER II

BASIS OF CHARGE

10.

Provisions regarding indirect transfer of capital asset situated in India Section 9

11.

Section 9(1)(i)- Benefit of non-applicability of indirect transfer provisions in case of Category I and II FPIs - Provisions for avoidance of double taxation in case of such indirect transfer provisions, where direct transfer has already been subject to tax

12.

a) Scope of Royalty Income -Section 9(1)(vi) of Income-tax Act, 1961

• Use of Standard Facilities
• Exclusion of packaged software from applicability of TDS under Section 194J of the IT Act:

13.

Explanation 5 to Section 9(1)(vi) – e commerce services

14.

Explanation 6 to Section 9(1)(vi) – telecom services

15.

Carry forward of excess foreign tax credit

CHAPTER III

Incomes which do not form part of Total income

16.

Definition of “Keyman Insurance Policy” -Section 10(10D)

17.

Section 10(13)- Payment from approved superannuation fund

18.

Annual receipts under section 10(23C)

19.

Rationalisation of Provisions of Section 10(23C)

20.

Income-tax exemption for securitization trusts, levy of distribution tax on income distributed by such trusts under section 10(23DA)

21.

Section 10(23FB) Tax exemption for Alternative Investment Funds – Venture Capital Funds

22.

Income of minors - to increase exemption limits under section 10(32)

CHAPTER IV

Computation of Total Income

PART A

SALARIES

23.

Re-introduction of standard deduction for salaried assessees- Section 16

24.

Deduction to salaried assesses- Payment for notice period

25.

Medical reimbursements for retired employees

26.

Partial double taxation of contribution to superannuation fund Section 17(2)(vii)

PART C

INCOME FROM HOUSE PROPERTY

27.

 Profits and gains of business or profession (Section 28)

28.

Deduction for maintenance charges paid to societies, federation etc.- Section 23

29.

Section 23(5) – Deemed Taxability of unsold stock of house property after 1 year of lying vacant – Non-applicability of restriction contained in section 71(3A)

30.

Deduction for ground rent other than u/s 24(a)

PART D

PROFIT AND GAINS OF BUSINESS AND PROFESSION

31.

Section 28(iiia) – Sale of license

32.

Section 28(iiid) – Duty Entitlement Pass Book Scheme no more in existence

33.

Section 32 - Depreciation in case of slump sale

34.

Benefit under Section 35(1)(iia) should be increased to 200 per cent from the present level of 125 per cent

35.

Applicability of Section 35(2AB) of the Act on expenditure incurred on scientific research carried outside the in-house R&D facility approved by the prescribed authority

36.

IT and ITES sectors should also be entitled to weighted deduction under Section 35(2AB) of the Act

37.

Weighted deduction should be available on expenditure incurred on internally developed intangible assets

Sr. No

Section

Issue/Justification

Suggestions

1.

Increase in the rate of surcharge increases cost of doing business for domestic companies

The Finance Act, 2015 increased

the rate of surcharge levied on domestic companies by 2 percent. The surcharge at the rate of 7 per cent shall be levied in case of a domestic company if the total income of the domestic company exceeds INR one crore but does not exceed INR ten crore and at the rate of 12 percent in case total income exceeds INR ten crore. The comparative scenarios of tax rate for domestic companies (including surcharge and education cess) is as follows:-

The Finance Act, 2015 has also increased the surcharge rate from 10 per cent to 12 per cent on DDT. The increase in surcharge by 2 per cent will bring the effective DDT rate to 20.358 per cent as against the present rate of 19.995 per cent. The increased rate of surcharge on tax makes cost of doing business in India significantly high. The increased tax cost will adversely impact the investors’ sentiments and economic growth.

Further, the effective tax rate applicable to domestic companies also happen to be one of the highest in the world with a very few countries1 levying a higher tax rate (of 34.6%) for income levels of more than INR 10 crore.

DDT is a levy on the company which was earlier levied in the hands of the shareholders. The increased DDT rate (inclusive of surcharge and education cess) creates disparity when compared with the tax rate of dividends received by an Indian company from specified foreign subsidiaries.

In the past, the government has introduced additional surcharge for a limited period, for example the Finance Act, 2013 had increased the surcharge from 5 percent to 10 percent on domestic companies whose taxable income exceeds 10 crores per year. Further in case of foreign companies, who pay the higher rate of corporate tax, the surcharge was increased from 2 per cent to 5 per cent. In case of dividend distribution tax or tax on distributed income, surcharge was increased from 5 per cent to 10 per cent. However, such additional surcharge was in force only for one year i.e. for Financial Year 2013-14.

The increased rate of surcharge on tax and DDT makes cost of doing business in India significantly high. It is recommended that the levy of additional surcharge on tax rates should be removed (regardless of the ceiling of income) on domestic companies. Further the additional surcharge on DDT should also be removed.

Since the government has already decaled that it will be reducing corporate tax rates from 30 per cent to 25 per cent in a phased manner, without prejudice to the above suggestion, the tax rates should be made inclusive of all surcharge.

2.

Section 2(15) – Need for defining “Yoga”

The definition of “charitable purpose” under section 2(15) has been amended to include ‘Yoga’ as a specific category thereunder. However, ‘yoga’ is not defined in section 2(15). Generally, the term ‘yoga’ is used in a wide sense to encompass different forms of meditation and physical, mental and spiritual practices. In the absence of specific definition, the scope and ambit of what constitutes yoga would be a subject matter of litigation, especially in the context of claiming exemption under

It is suggested that the term ‘yoga’ be defined in order to confine its scope and prevent abuse of the provision by institutions engaged in other activities of similar nature not constituting yoga.

3.

Section 2(15) – Substitution of existing provisos with new proviso requiring satisfaction of two new conditions for qualifying as a “charitable purpose”

The proviso to Section 2(15) provides that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless,-

such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

the aggregate receipts from such activity or activities, during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year.

Probable hardship

a) The erstwhile section 2(15) provided for a monetary limit of ₹ 25 lakhs upto which the receipts as may be derived from the activities in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business may still be regarded as charitable purpose, in case of a trust whose object is advancement of any other object of general public utility. The amendment by the Finance Act, 2015 has replaced this monetary limit with a percentage of total receipts. Unintentionally, it may adversely impact small charitable trusts and benefit charitable trusts having a higher turnover. For example,

a) charitable trust having annual receipts of ₹ 100 crores would be able to retain its charitable status if its business receipts are ₹ 20 crores or less, whereas a charitable trust having total receipts of ₹ 10 lakhs may lose its charitable status even if it has ₹ 2.50 lakhs as receipts from activity in the nature of trade, commerce or business. The amended proviso may, therefore, result in unintended hardship to small charitable trusts engaged in genuine charitable activities.

b) Further, there appears to be an element of subjectivity in the first condition in the proposed proviso requiring such activity to be undertaken in the course of actual carrying out of such advancement of any other object of general public utility, which may give rise to unnecessary litigation. Therefore appropriate guidelines/clarification may be issued by way of a circular or otherwise to ensure clarity as to when an activity is not considered as being undertaken in the course of actual carrying out of such advancement of any other object of general public utility. This would provide the necessary guidance to the charitable trusts to ensure compliance with the said condition and also enable the Assessing Officers to examine judiciously whether the said condition has been satisfied for grant of exemption. In this context, it may also be noted that there is already a requirement in section 11(4A) that the business should be incidental to the attainment of the objects of the trust or institution and separate books of account should be maintained by such trust or institution in respect of such business. Therefore, there is no need for a similar condition in section 2(15).

It is suggested that: The proviso also includes a monetary limit, say ₹ 25 lakhs, in line with the erstwhile second proviso so that charitable trusts with lower turnover continue to get the benefit available to charitable trusts under the current law. The same may be given effect to by amending the condition given in (ii) as below:

“(ii) the aggregate receipts from such activity or activities, during the previous year, do not exceed twenty percent. of the total receipts, of the trust or institution undertaking such activity or activities, or twenty-five lakh rupees, whichever is higher, for the previous year.”

• Since section 11(4A) already contains a similar condition for grant of exemption, the condition specified in clause (i) of the proviso to section 2(15) may be removed.
• Further, appropriate guidelines/clarification may be issued in respect of clause (i) of the proviso to section 2(15)to enable trusts to comply with the condition requiring such activity to be undertaken in the course of actual carrying out of advancement of any other object of general public utility for claim of exemption.

4.

Mandatory application of income by charitable trusts/ institutions under section 10(23C)

Application of income is mandatory by charitable trusts/institutions including those enjoying benefits under section 10(23C) to its objects, subject to accumulation of not more than 15% of its income including income from voluntary contributions. Similar provisions under section 11(1) read with section 12(1) exclude 'corpus donations' (voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution) from the mandatory requirement of application of the income. No such provision has been made in section 10(23C). This will compel the Institutions coming within the scope of section 10(23C) to apply even their corpus donations to the day today activities for getting the exemption. This will be prejudicial to them because they cannot build up the corpus fund.

Section 10(23C) should be amended to specifically exclude 'corpus donations' from the requirement of mandatory application of income by such trusts / institutions.

(SUGGESTIONS FOR

RATIONALIZATION OF THE

PROVISIONS OF DIRECT TAX

LAWS)

5.

Clarification regarding exemption of interest on deposits by co-operative societies with multi-State cooperative banks

It is seen that that when a cooperative society places deposits in a co-operative bank the Assessing Officers are denying the benefit of Section 8OP on the interest earned on such deposits. The denial is based on the erroneous application of a judgement that has held that a co-operative bank is not entitled to the benefit of Section 80P. This may be set right by a clarificatory amendment.

Further, the intent of legislation is clearly to allow the deduction to any co-operative society which earns interest from deposits with a co-operative bank. However, the definition of co-operative Society as given in section 2(19) of the Act refers to Co-operative Society registered under the Cooperative Societies Act 1912 and societies registered under the State Co-operative Societies Act.

Since this definition does not refer to Societies registered under the Central Act, under which numerous Multi-state Cooperative Banks are registered, the interest earned by a cooperative society from a deposit with a Multi-state Co-operative Bank is therefore technically not eligible for deduction of the interest earned on such deposit.

This leads to an anomalous situation ‘that a cooperative society keeping a bank deposit with a State level Co-operative Bank gets such interest as nontaxable but if the same cooperative society keeps the deposit with a Multi-state Co-op Bank, then such interest is taxed. It is submitted that this is not the intent of the legislation.

The anomalous position may be rectified by making suitable amendment in section 2(19) defining a Co-operative Society, by including therein a society registered under the Central Act currently applicable.

6.

Section 2(42A) – Reduction in holding period in case of immovable property, being land or building or both, to qualify as long term capital asset – Consequential amendments to be made in sections 54, 54B, 54D and 54F

The Finance Act, 2017 amended section 2(42A) so as to reduce the period of holding from the existing 36 months to 24 months in case of immovable property, being land or building or both, to qualify as long term capital asset. The same is done to promote the real estate sector and to make it more attractive for investment.

Issues

(1) Consequential amendments for reducing the holding period of immovable property from 3 to 2 years is required to be made in sections 54, 54B, 54D and 54F in line with the amendment in section 2(42A). At present, these sections restrict transfer of new assets purchased for 3 years.

(2) In order to avoid litigation, clarification is required on whether leasehold rights and tenancy rights would be considered to fall within the meaning of “land and building” to avail the benefit of reduced holding period for being treated as a long-term capital asset.

(3) Ambiguity may also arise with respect to flats in a co-operative society i.e. whether shares in a co-operative society qualify within the meaning of immovable property being land or building or both to become eligible for lower holding period of two years.

It is suggested that:

(1) Consequential amendments may be made in sections 54, 54B, 54D & 54F so as to enable the holding period of the new asset purchased to be reduced to 2 years from 3 years in case of land and/or building.

(2) Circular may be issued/Explanation may be inserted to clarify that leasehold rights and tenancy rights are also to be treated as falling within the meaning of “land and building” for the purpose of availing the benefit of reduced holding period for being treated as a long-term capital asset.

(3) In order to avoid any interpretation issue, it may be clarified that flats in a co-operative society are also covered within the meaning of immovable property being land or building and are hence, eligible for lower holding period of two years for computation of capital gains.

7.

Section 2(42A), section 47(xb) and section 49(2AE) - Tax neutral conversion of preference shares to equity shares – Clarification regarding tax treatment for earlier years

The Finance Act 2017 amended Section 47 of the Act, by virtue of which conversion of preference share of a company into equity share of that company will not be regarded as transfer. The amendment is made by insertion of sub-section (xb) in section 47. Consequent amendments were also made in section 2(42A) of the Act by insertion of subclause (hg) in clause (i) of Explanation 1 to section 2(42A) for determining the period of holding of such equity shares, by including the period of holding of the preference shares as well.

Further, sub-section (2AE) is inserted in section 49 to compute the cost of acquisition of the converted equity shares. As per the amendment, the cost of such equity shares shall be deemed to be the cost of acquisition of preference shares.

Currently, conversion of bond or debenture of a company into shares of that company is not regarded as transfer. However, no similar tax exemption was available so far in case of conversion of preference shares of a company into its equity shares.

It is suggested that

a) Since this amendment has clarified the real legislative intent, a clarification may be given by way of Explanation in section 47 or by way of an Explanatory Circular that the aforesaid provisions would be applicable in respect of earlier years as well.

b) Also, conversion of warrants into equity shares may be covered under section 47.

8.

Section 3- Definition of Previous year

In Income-tax Act, 1961 is "Assessment Year" defined in Section 2(9) as: “Assessment Year" means the period of twelve months commencing on the 1st day of April every year. "Previous Year" is defined in Section 3 of the Income-tax Act, 1961 to mean “for the purpose of this Act, “previous year” means the financial year immediately preceeding the assessment year.

There is no difference in the period of Assessment Year & Previous Year since both are financial year/Income Year for accounting purpose.

A normal income tax assessee does not understand the difference of wordings of Assessment Year (AY) & Previous Year/ Accounting Year (AY) and gets confused in presenting his details, while paying Advance Income tax, TDS or filing the return of income Tax. Everybody considers Assessment Year (AY), previous year (PY) and Accounting Year (AY) as same.

To avoid misunderstanding or confusion among Income Tax payers (Assessees) and for keeping the records, the concept of “previous year” and “assessment year” may be replaced with the “financial year” of “previous year”. Even though, the said suggestion has been considered while framing the Direct Taxes Code, to simplify the law, it would be appropriate to bring the change in the Income-tax Act itself.

In line with the provision of section 320(92) read with section 2 of the Direct Taxes Code, 2013 the concept of “previous year” and “assessment year” may be replaced with the “financial year” to mean as below:

“financial year” as per Direct Taxes Code,2013 means-

(a) the period beginning with the date of setting up of a business and ending with the closure of the business or the 31st day of March following the date of setting up of such business, whichever is earlier;

(b) the period beginning with the date on which a source of income newly comes into existence and ending with the closure of the business or the 31st day of March following the date on which such new source comes into existence, whichever is earlier;

c) the period beginning with the 1st day of the financial year and ending with the date of discontinuance of the business or dissolution of the unincorporated body or liquidation of the company, as the case may be;or

(d) the period of twelve months commencing from the 1st day of April of the relevant year in any other case;

9.

Place of Effective Management provisions – section 6(3)

POEM Guidelines have been recently finalised only on 24th January, 2017, whereas the POEM provisions are already applicable w.e.f. 1st April 2016 (applicable from AY 2017-18 and onwards)

The Finance Act 2016, while deferring POEM by one year to be effective from AY 2017-18 onwards, also introduced section 115JH which gives power to CBDT to notify a transitory regime setting out the manner in

which the provisions of Income Tax Act shall apply to companies whose POEM is held, for the first time, to be located in India as also to companies whose POEM is held to be in India during the course of assessment proceedings. CBDT is yet to notify this transitory regime.

The taxpayers must be given some time to arrange their affairs to comply with POEM Guidelines and also have clarity on transitory regime.

In light of the above, it is suggested that applicability of POEM should be deferred by a year (i.e. from A.Y. 2018-19 onwards).

Sr. No

Section

Issue/Justification

Suggestions

10.

Provisions regarding indirect transfer of capital asset situated in India Section 9

The Finance Act, 2015 has amended provisions dealing with indirect transfer of capital asset situated in India. The amendment provides clarity on certain contentious aspects with regards to taxation of income arising or accruing from such indirect transfers. The following amendments have been introduced in the Act.

Share or interest in a foreign company or entity shall be deemed to derive its value substantially from Indian assets only if the value of Indian assets (whether tangible or intangible) as on the specified date exceeds the amount of INR 10 crores and represents at least 50 per cent of the value of all the assets owned by the foreign company or entity.

The value of an asset shall be its Fair Market Value (FMV). Subsequently, the CBDT notified the Rules prescribing the manner of computation of FMV of assets of the foreign company or entity and the reporting requirements by the Indian concern.

The date of valuation of assets (without reducing the liabilities) shall be as at the end of the accounting period preceding the date of transfer. However, in case the valuation of assets as on the date of transfer exceeds by at least 15 per cent of book value of the assets as on the date on which the accounting period of the company/entity ends preceding the date of transfer, then the specified date shall be the date of transfer.

Exemption from applicability of the aforesaid provision has been provided in the following situations

Where the transferor along with its related parties does not hold (i) the right of control or management; (ii) the voting power or share capital or interest exceeding 5 per cent of the total voting power or total share capital in the foreign company or total interest in the entity directly holding the Indian assets (Holding Co).

In case where the Indian assets are not directly held, then if the transferor along with related parties does not hold (i) the right of management or control in relation to such foreign company or the entity; and (ii) any rights in such foreign company which would entitle it to either exercise control or management of the holding company or entitle it to voting power exceeding 5 per cent in the holding company.

The Finance Act, 2015 has introduced Section 47(vicc) in the Act which, subject to fulfillment of certain conditions provides that transfer of shares of a foreign company (which directly or indirectly derives its value substantially from shares of an Indian company) by the demerged foreign company to the resulting foreign company under a scheme of demerger will not be regarded as transfer.

The Indian entity will be required to furnish information relating to indirect transfers. The same has also been notified. In case of any failure, the Indian company will be liable for a penalty of INR 5 lakhs or 2 per cent of the value of the transaction as specified.

Since the objective of the amendment is to tax indirect transfer through shell companies, a listed company should not be considered as a shell or conduit company. The same was also suggested by the Shome Committee. It is recommended that exemption should be provided in respect of transfer of shares in a foreign company (listed on a stock exchange outside India) having substantial assets located in India.

Intra-group transfers as part of group reorganisations (other than amalgamation and demerger) should also be exempt from the indirect transfer provisions.

While Explanation 5 to Section 9(1)(i) of the Act provides that shares of a foreign company which derives directly or indirectly its substantial value from the assets located in India shall be deemed to be situated in India.

Section 47(vicc) of the Act provides exemption only if the shares of foreign company derive substantial value from shares of an Indian company. While the intent may be to exempt all cases of demerger where foreign company derives substantial value from assets located in India, the reading of Section 47(vicc) of the Act indicates that the said exemption would be available only in cases where the shares of the foreign company derive substantial value from shares of Indian company. Due to this inconsistency in the language of Section 47(vicc) vis-àvis Explanation 5 to Section 9(1)(i), transfer of shares of a foreign company which derives its value

predominantly from assets located in India (other than shares of an Indian company) under a scheme of demerger may be deprived of the aforesaid exemption. It is recommended that Section 47(vicc) of the Act should be amended to provide that “any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of subsection (1) of section 9, which derives, directly or indirectly, its value substantially from the assets located in India, held by the demerged foreign company to the resulting foreign company, if,- ………………..”

It is suggested that a similar amendment should also be made under Section 47(viab) of the Act (in case of amalgamation).

of Section 234A, 234B, 234C and 201(1A) of the Act should not be applied in cases where a demand is raised on a taxpayer on account of retrospective amendment relating to indirect transfer. An appropriate amendment should be made in the respective provisions of the Act.

11.

Section 9(1)(i)- Benefit of nonapplicability of indirect transfer provisions in case of Category I and II FPIs - Provisions for

The Finance Act, 2012 amended Section 9(1)(i) of the Act with retrospective effect from 1st April 1962 to provide that any share or interest in an entity incorporated outside India shall be deemed to be situated in India if such share or interest derives, directly or indirectly, its value substantially from assets located in India.

The Finance Act, 2017 provided that the aforesaid deeming provisions shall not apply to an asset or capital asset mentioned in Explanation 5 of section 9(1)(i), which is held by a nonresident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD and registered as Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992. 

The Finance Act, 2017 exempted investors (direct / indirect) in category I (sovereign funds) and category II (broadbased funds) FPIs from the application of indirect transfer tax provisions.

The CBDT has, recently, issued a Circular No. 28/2017 dated 7 November 2017 clarifying that the indirect transfer provisions shall not apply to income arising to a non-resident on redemption or buy-back of shares held indirectly through specified funds, if such income is consequent to transfer of shares held in India by the specified funds and such direct transfer is taxable in India.

The Circular applies to specified funds (VCF, Category I or II – AIF) and not to offshore funds in general. Further, the exemption will be restricted to pro-rata share (of the non-resident) in the total consideration realized by the specified funds from the said transfer of shares or securities in India.

It is suggested that:

While issuance of Circular no. 28/2017 is a welcome clarification for non-residents in respect of redemption or buyback of shares held indirectly through specified funds (FPIs registered as Category -I or Category –II), in respect of other offshore funds the indirect transfer provisions may still lead to double taxation Therefore, a suitable amendment should be brought in to the effect that exemption is extended to all offshore funds (interalia Category-III FPIs) and should not be restricted to specified funds.

12.

Scope of Royalty Income -Section 9(1)(vi) of Income-tax Act, 1961

(a) Right to use a copyright vis-à-vis Right to use a copyrighted article

Internationally, as evidenced by OECD Commentary and opinion of eminent experts, the following two basic principles with regard to software payments are recognized and well settled:

(i) The proposition that “right to use a copyright” is different from “right to use a copyrighted article” is recognized and it is only the ‘right to use a copyright’ which is covered within the definition of royalty.

(ii) The distributor of computer software does not pay to exploit any rights in the software but only for acquisition of the software for further circulation. In view of these, payments made by a distributor to the copyrighter holder are in the nature of business income and not royalty income.

Also, ‘Packaged /Canned Software’ means ready-made software that could be sold off the shelf. Sale of such software products represent sale of copyrighted articles as against a copyright i.e. such transactions represent sale of goods. Packaged software has been held to be ‘Goods’ even by the Supreme Court in case of TCS vs. State of AP (271 ITR 401). The Central Board of Excise and Customs (“CBEC”) has recognized ‘Information Technology Software’ as ‘Goods’ and classified the same as Central Excise Tariff Item 8523 80 20 in Schedule I to the Central Excise Tariff Act, 1985. Further, ‘Packaged Software/Canned Software’ is recognized as ‘Goods’ for the purposes of Central Excise Law by the CBEC, which is another wing of the Ministry of Finance. These facts lead to the conclusion that ‘Packaged Software /Canned Software’ are in the nature of ‘Goods’ and the legislation also recognizes the same.

Given the above, it is recommended that a specific amendment be made to the Income-tax Act to exclude ‘Packaged/Canned Software’ from the purview of ‘royalty’ defined under Section 9(1)(vi). Further, in certain cases, these software products are downloadable from the internet and not necessarily delivered in tangible media such as a CD or a DVD. However, irrespective of the mode of delivery, the fact remains that what is sold is a ‘copyrighted article’ and not a ‘copyright’.

(b) Use of Standard facilities

The Apex Court in CIT Vs. Kotak Securities Limited has clarified that the common services which are necessary for carrying out trading in securities for which transaction charges are paid, do not amount to technical services.

c) Exclusion of packaged software from applicability of TDS under Section 194J of the Income-tax Act

Circular No. 13/2006, dated 13.12.2006 issued by the CBDT states that TDS shall be applicable only when there is a ‘contract for work’ and not where there is a ‘contract for sale’. This proposition has also been upheld in various judicial precedents like BDA Limited vs. ITO (TDS) 281 ITR 99 (HC Bom), CIT vs. Dabur India Limited (283 ITR 197) (HC Del).

Considering the facts and arguments above, it is clear that transaction of sale of ‘Packaged/Canned Software’ is a ‘contract for sale’ as against a “contract for work’ and consequently, should not attract TDS provisions. It is relevant to note that ‘Packaged/Canned Software’ is also subject to excise duty. There are no other goods in India which are subject to both excise duty and TDS.

An amendment to the Incometax Act to exclude ‘Packaged/Canned Software’ from the purview of ‘royalty’ would automatically exclude the transactions from the purview of Section 194J of the Income-tax Act and would help resolve the withholding tax issue faced by traders of hardware with embossed software. The distribution network and channel partners for off the shelf packaged software also deal with hardware like computers, desktop etc. The packaged software is mostly sold along with the hardware, on the same invoice. There is no obligation of TDS on any hardware items, and the traders are finding it confusing and difficult to discharge the TDS obligation arising out of the sale of the ‘Packaged Software/Canned Software’. Resolution of the definition of royalty to exclude ‘Packaged Software/Canned Software’ would also help traders and boost ease of business.

Separately, Software Ancillary Services such as Upgrade Fees, Subscriptions, etc. which do not involve transfer of rights, or grant of license but involve only payments of consideration for services is not ‘Royalty’ for the purposes of Section 194J read with Section 9(1)(iv) Explanation 2 of the Income-tax Act. Clarification may be issued that AMC’s, Upgrade Fees, Subscriptions, etc. which do not involve transfer of rights, or grant of license, but involve only payments of consideration for services is not “Royalty” for the purposes of Section 194J read with Section 9(1)(iv) Explanation 2 of the Income-tax Act and that such transaction are not liable for TDS under Section 194J of the Act.

It is suggested that payments for copyrighted article like shrink-wrapped software as also payments made by distributors of software be specifically excluded from the definition of “royalty”.

In view of decision of Apex Court in CIT Vs. Kotak Securities Limited an exception should be carved out in Explanation 6 to Section 9(1)(vi) so as to exclude payments for use of standard facilities to the general public at large like payments for telephone service, internet service, cable television services and other similar services.

To bring utmost clarity, it is also suggested that a specific amendment be made to Section 194J to exclude sale of software products from the ambit of tax withholding. In this regard, it is suggested that the following provision be included in Section 194J of the Act:

Amendment required “194J. (1) Any person, … Provided that no deduction shall be made under this section-

1. …

2. …

from any sums, if credited or paid for the transfer of a computer software (including the granting of a licence), along with or without a computer or computer-based equipment or for ancillary services such as up gradation or subscriptions, which does not involve transfer of all or any rights in respect of any copyright.”

13.

Explanation 5 to Section 9(1)(vi) – e commerce services

Explanation 5 to Section 9(1)(vi) has been introduced by Finance Act, 2012 w.e.f. 1st June 1976 to clarify that royalty includes and has always included consideration in respect of any right, property or information, whether or not the right, property or information is used directly by the payer or is located in India or is in the control or possession of the payer.

It appears that this amendment may also cover within its domain payment for telecom services (including basic / mobile telephony, internet charges, roaming charges, interconnect charges, etc.); e-commerce transactions like access of data bases, cloud computing; etc. which may not be the real intention. Even internationally, a large variety of above referred transactions are not covered within the ambit of “royalty”.

In view of the reasoning given, it is suggested that the Government should clarify by way of insertion of a proviso or issue of a Circular that Explanation 5 as mentioned would not be applicable to any payments for telecom services; ecommerce transactions; etc.

14.

Explanation 6 to Section 9(1)(vi) – telecom services

Expansion of definition [Explanation 6 to section 9(1)(vi)] of 'process' so as to include transmission by satellite, cable, optic fiber or by any other similar technology within definition of “Royalty” should be dropped as it is negatively impacting telecom sector and leading to:

(i) Non viability for Indian entrepreneurs to run such capital intensive projects due to rise in cost, as the overseas service providers (of roaming, bandwidth, etc.) would seek to shift their tax burden (TDS and Income-tax) to Indian players.

(ii) Increase in cost of basic amenities (like telephone, internet, electricity, cable charges etc.) to the general public at large and adding on to inflation.

In a bid to fuel the highly competitive and unnerved Telecom Industry as well as to bring in certainty, the government should clarify by way of insertion of a proviso or issue of a circular that Explanation 6 would not be applicable to any payments for telecom services including basic / mobile telephony, internet charges, roaming charges, interconnect charges, etc.

15.

Carry forward of excess foreign tax credit

The Income-tax Act, 1961 allows for set off in respect of foreign taxes paid on overseas income. However, in case of loss/inadequate profits, no set off may be possible. In the current economic scenario of the global economy, business outlook has become extremely uncertain and results have become very volatile.

It is suggested that assessees be permitted to carry forward (say for five years) such unutilized credit (in USA such relief is granted vide section 904(c) of Federal Tax Act) for adjustment in future years.

(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Sr. No

Section

Issue/Justification

Suggestions

16.

Definition of “Keyman Insurance Policy” - Section 10(10D)

Any sum received under a Keyman insurance policy is not exempt under section 10(10D). The meaning of “Keyman Insurance Policy” given in Explanation 1 to section 10(10D) was amended by Finance Act, 2013 to include such policy which has been assigned to a person at any time during the term of the policy, with or without consideration”. This amendment is effective w.e.f. 1.4.2014 (i.e. A.Y.2014- 15).

The effect of this amendment is to deny the benefit of exemption in respect of maturity proceeds of keyman insurance policy which has been assigned to a person during the term of the policy, whether with or without consideration, by including the assigned policy within the definition of “Keyman insurance policy”.

The issues under consideration and suggestions thereof in this regard are as follows –

The entire proceeds would be subject to tax under section 17(3)(ii) in the hands of the person to whom the policy is assigned, whereas only the premium paid by the employer on which deduction has been claimed less the surrender value paid by the employee to the employer at the time of assignment should be subject to tax, since the same represents the actual benefit availed by the assignee.

It is suggested that section 17(3)(ii) may be appropriately amended to provide that tax would be levied only to the extent of such difference, or in the alternative, deduction for surrender value may be provided for under section 16.

In such a case, the employer can deduct tax at source on the differential amount treated as “profit in lieu of salary” at the time of assignment.

Further, in any case, the maturity proceeds received on death of the assignee should be kept out of the tax net. This benefit is similar to the exemption given in respect of life insurance policies, where the annual premium paid exceeds 10% of minimum sum assured.

17.

Section 10(13)- Payment from approved superannua tion fund

Section 10(10AA) provides for exemption for payment received as cash equivalent of leave salary in respect of earned leave period at the time of retirement whether superannuation or otherwise.

Section 10(13) provides for exemption with regard to payment from an approved superannuation fund. Section 10(13)(ii) of the Act provides for exemption in the hands of the employee in respect of the amount received on commutation of the annuity in case of retirement at or after a specified age or becoming incapacitated prior to such retirement. This provision however, does not cover commutation of an annuity paid on voluntary retirement of the employee.

Section 10(10AA), as mentioned above, has taken care of such case by using the terminology “or otherwise”. Since the intention of the law makers is clear by the wordings of section 10(10AA), section 10(13)(ii) may be appropriately amended to include the words “or otherwise”. This will provide relief to genuine taxpayers who are taking voluntary retirement.

Section 10(13) may be amended to exempt commuted value received by an employee from the superannuation corpus standing to his credit at the time of voluntary retirement, by including the words “or otherwise” in line with section 10(10AA) of the Income tax Act, 1961. (SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

18.

Annual receipts under section 10(23C)

Under section 10(23C)(iiiad) and (iiiae) of Income-tax Act, it is provided that the income of University/Educational institutions/hospitals/ other institutions specified therein will be exempt provided they comply with the conditions stipulated therein. Also, it is provided that “aggregate annual receipts” of such institutions shall not exceed the amount of annual receipts as may be prescribed. Though annual receipts have been prescribed as ₹ 1 crore vide Rule 2BC of Income-tax Rules, the word “annual receipts” have not been defined in the Income-tax Act. It is not clear as to whether:

(a) for computing “annual receipts” only the receipts of such institutions from educational/hospital activities alone are to be considered each year;

(b) Certain receipts of such institutions that are not received on annual basis e.g. receipts from sale of property, equity shares and other proceeds on divestment are to be excluded from the computation of “annual receipts”;

(c) In certain cases where such charitable institutions receive donations in kind in the form of land, movable assets etc. whether “annual receipts” would exclude such receipts since they are not received annually.

It is suggested that “Annual Receipts” be clearly defined as income of the hospitals/ educational institutions arising regularly/every year but excluding value of donation received in kind by way movable assets, land, hospitals/educational equipment, sale consideration received on disposal of land, shares or other movable property, hospital/educational equipment etc.

Further, it may be specifically provided that donations received towards corpus by way of land, movable assets are excluded from computation of “Annual Receipts” as prescribed under Rule 2BC of Income-tax Rules. (SUGGESTIONS TO REDUCE / MINIMIZE LITIGATIONS)

19.

Rationalisation of Provisions of Section 10(23C)

The 15th Proviso to Section 10(23C) states that application for obtaining approval under this section shall be made on or before 30th September of the relevant assessment year from which the exemption is sought. For example, if an institution seeks approval for Financial year 2017-18, it will have to apply up to 30th September 2018. Further, the 9th proviso to Section 10(23C) states that order granting approval or rejection shall be passed within 12 months from the end of month in which such application was received. In view of this proviso, in respect of applications received on 30th September 2018, the order has to be passed on or before 30th September, 2019. So the status of the application is not known till next 12 months i.e. for 2 financial years.

If such institution is not granted approval as on 30th September 2019 then it will have to pay income tax for Financial year 2017-18 and 2018-19. Resultantly, the charitable institution will have to face heavy tax burden.

At the same time it is to be noted that ITD doesn’t accept such application before close of financial year i.e. application for F.Y. 2017-18 cannot be made on or before 31st March 2018, though there is no such restriction under the Act.

It is suggested that:

Such application should be allowed to be made at any time during the financial year for which exemption is sought even if the annual receipts have not exceeded or is not expected to exceed the limit of ₹ 1 crore.

Time limit for granting approval may be reduced from 12 months to “within 4 months from the end of the month in which application has been filed”, so that any institution should be well aware of its status before due date of filing its income tax return.

20.

Income-tax exemption for securitizati on trusts, levy of distribution tax on income distributed by such trusts under section 10(23DA)

The securitization trust has so far been treated as a pass through vehicle for tax purposes i.e. all the income of the securitization trust has been offered to tax by its investors (unless the investor is tax exempt viz., a mutual fund). This is consistent with the tax rules that apply to trusts under the tax law which prescribes a single level tax on a trust’s income (i.e. tax is levied either on the trustee or on the beneficiaries). The interest income arising to such trusts from securitized debts is taxed directly in the hands of the contributories.

The tax implications may be summarized as follows:-

• contributory is a Mutual Fund, it

will be entitled to exemption under section 10(23D).

• other contributory can claim

Instead of distribution tax model, a complete pass through model identical to pre 1st June 2013 regime be made applicable to Venture Capital Funds/Venture Capital Companies under section 10(23FB) read with section 115U, since the participation in PTCs is largely restricted to well- regulated financial institutions.

(SUGGESTIONS TO REDUCE / MINIMIZE LITIGATIONS)

deduction for corresponding expenses against such income (eg. interest and overheads)

• can claim credit of

TDS, if any, made by the borrower

However, due to disputes regarding the person on whom tax incidence lies, tax demands were raised on the securitization trusts rather than the investors, by treating such trusts as AOPs. In order to set at rest such controversies, the Finance Act 2013 :

• the securitization trust

from tax on income earned.

• a distribution tax on

income distributions by the securitization trust @ 25% in case of distributions to individuals and HUFs and @ 30%in other cases.

• tax will not be payable

on income distributed by the securitization trust to a person in whose case income, irrespective of its nature and source, is not chargeable to tax under the Act (viz. mutual funds).

• the investors in the

securitization trust from taxation on income distributions received.

The above mentioned provisions have, however, created certain problems or securitized structures in vogue on account of the following reasons:

(a) The exemption to the investors in the securitization trust means that investors (other than exempt investors such as mutual funds) in pass through certificates (PTCs) will now earn exempt income

instead of taxable income as was the case hitherto. This implies that the investors would not be able to set-off expenditure/ losses against income earned from PTCs in view of provisions of section 14A which prohibits deduction of any expenditure incurred in relation to exempt income. This may result in the entire transaction becoming unviable for investors, which is illustrated below.

If the investor is a bank investing ₹ 100 crores in a Securitized debt yielding interest @ 10% p.a. Assuming, that the bank’s own cost of borrowing is say 8% p.a., its tax liability on interest income from securitized debt pre and post amendment and profit after tax is as follows :-

Less :- Interest expenditur e @ 8% on ₹ 100 Cr

(B)

8.00 Cr

8.00 Cr

Net income

C= (A- B)

2.00 Cr

(1.00)

Cr

Tax payable

By Investor

@ 30%2 on net income

(D)

0.60 Cr3

-

Profit/(Loss

) after tax

(C- D)

1.40 Cr

(1.00)

Cr

Not allowed to be set-off on account of section 14A.

The above illustration highlights that a structure which was commercially viable prior to amendment made by Finance Act, 2013 has the effect of becoming unviable solely due to change in the basis of incidence of taxation.

It may be noted that the financial sector works on spread between yield from

investments and own cost of borrowing. Levy of distribution tax severely impacts the spread and make securitization structures commercially unviable defeating the object of SEBI and RBI guidelines for orderly development of securitization market.

• trading of PTCs (most PTCs are tradable instruments) also creates dual points of taxation (i.e. at the time of distribution of income by the securitization trusts and at the time of realization of gain when the PTC itself is sold for a profit) which seems to be unintended.
• also arises for the borrower while evaluating withholding obligation at the time of payment of interest. Since the securitization trust is assessable as a separate tax entity and not a mutual fund or bank exempt from withholding, the borrower will be required to withhold tax unless the trust provides NIL withholding certificates. The securitization trust will be required to file return to claim refund of such TDS. The securitization trust should be able to set off TDS credit against distribution tax payable by it.

There is no grandfathering provided for existing securitized trusts. Hence, any income distributed by existing securitized trusts on or after 1 June 2013 will also be subject to the new tax regime.

21.

Section 10(23FB) Tax exemption

Earlier under Section 10(23FB) of Income-tax Act, any income of a Venture Capital Company (VCC) or Venture Capital Fund (VCF) set up to raise funds for investment was exempt

It is suggested that section 10(23FB) be reworded as follows:

“Any income of a

for Alternative Investment Funds – Venture Capital Funds

from taxation. However, in 2007, this was amended and the scope of VCC / VCF was narrowed down to select sectors and the exemption from income tax was limited to “any income of a VC company or VC fund from investment in a venture capital undertaking”.

The sectoral restriction stands removed in Union Budget, 2012 which was a welcome move. However, the tax exemption still remains limited to “any income of a VC company or VC fund from investment in a venture capital undertaking”. Keeping in mind the growing importance of VC funds in infrastructure and also in other important sectors of our economy, the previous wording of “set up to raise funds for investment” needs to be restored in place of “from investment” under Section 10(23FB).

A change in the wording from “any income of a VC company or VC fund from investment” to “any income of a VC company or VC fund set up to raise funds for investment” will enable the VCC / VCF to undertake analysis / study necessary to evaluate the project viability as well as to render other services for the projects in which investments are made. Restricting the wording to “any income of a VC company or VC fund from investment” severely restricts the tax exemption thus affecting the commercial viability of the VCC / VCF.

venture capital company or venture capital fund from investment set up to raise funds for investment in a venture capital undertaking.”

(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

22.

Income of minors - to increase exemption limits under section 10(32)

At present income of minors included in the hands of parents is exempt to the extent of ₹ 1,500/- for each minor. The average expenditure to meet cost of a minor's education/health/living expenses which has gone up considerably in recent years, limit of ₹ 1,500/- fixed is woefully inadequate.

It is suggested that this should be raised to at least Rs.10,000/- for each minor child.

(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Sr. No

Section

Issue/Justification

Suggestion

23.

Re- introduction of standard deduction for salaried assessees- Section 16

Salaried employees are not allowed deduction of any expenses incurred during the course of the employment other than profession tax on employment.

There are various expenses that the employees incur during the course of employment which they cannot claim as deduction.

At the same time, the few exemptions that are available to them u/s 10 are subject to upper limits which have been fixed several years back and virtually serve no purpose on account of inflation.

Employees during the course of their employment incur various expenses, including for upgrading skill, for rendering their services as employees, deduction for such expenses should be allowed.

For avoiding leakage of revenue if any such deduction maybe a fixed sum or certain percentage of salary, say 25% of the salary, but maximum may be restricted upto say ₹ 5,00,000/- .

Doing away with the multiple exemptions will help in cleaning up the Act and removing unwieldy provisions – thereby simplifying the law.

Provisions similar to that of erstwhile standard deduction may be re-introduced. Simultaneously, the multiple exemptions that are available (with miniscule upper limits) may be done away with.

24.

Deduction to salaried assesses- Payment for notice period

As per the prevalent norm, the employees are required to serve notice within the stipulated time before leaving the organisation. The notice period, however, varies from organisation to organisation. For example, in an organisation the notice period may be 90 days or an employee has to pay 90 days salary amount to the organisation as an employee may get a better job opportunity in another organisation wherein he is required to join within 30 days. Accordingly the employee has to give 30 days’ notice in old organisation, and pay for short notice of 60 days.

Generally, the contract of service also provides that in case the employer is not satisfied with the performance of the employee he may terminate his services by giving a notice of 30 days or 30 days salary. In case the employer suspends the employee with immediate effect he pays an amount equivalent to 30 days salary and claims deduction thereof. Such amount becomes taxable in the hands of the employee. However, in case the employee is required to pay notice period salary, no deduction of such amount paid is allowed to him. If the new employer agrees to bear the brunt of notice period pay, say of 60 days in above example, the said amount will be included in the total income of the employee and tax will be deducted thereon even if such income belonged to the ex-employer and is taxable in his hands. Thus, in effect the assessee will be liable to pay tax on 14 months’ salary i.e. salary for more than 12 months without any deduction available to him.

It is suggested that said anomaly may be resolved and appropriate provisions be inserted so that income from notice period pay is chargeable in the hands of ex- employer and deduction of the amount of notice period pay paid be made available to the employee as he has not effectively received that income.

(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

25.

Medical reimbursemen ts for retired employees

Under section 17 of the Income- tax Act, medical reimbursements to employees are exempted from tax up to ₹ 15,000 per annum. Further, the expenditure incurred by the employer for the medical treatment of the employees and his family in approved hospitals is also not treated as a perquisite in the hands of the employee. However, this tax benefit is not available to retired employees.

It is suggested that the provisions of section 17 be amended to include retired employees for the tax benefit on medical reimbursements / hospitalization expenditure in approved hospitals.

(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

26.

Partial double taxation of contribution to superannuati on fund - Section 17(2)(vii)

Section 17(2)(vii) of the Act, as amended by the Finance Act, 2016, provides that any contribution to an approved superannuation fund by the employer, to the extent it exceeds one lakh and fifty thousand rupees, will be taxable as a perquisite in the hands of the employee.

Contributions to

superannuation fund may or may not result in superannuation benefits to the employees, since there are various conditions to be fulfilled by the employees like serving a stipulated number of years, reaching a certain age etc. Further, the pension payments are subject to tax at the time of actual receipt by the employee after his retirement. This may lead to partial double taxation for the employee where the contributions had been taxed earlier also (when the contributions exceeded INR one lakh and fifty thousand rupees).

It is suggested that the employer contributions to an approved superannuation fund may be made fully exempt from tax. This will also encourage one of the key focus areas of the Government of creating a pension based society.

Sr. No

Section

Issue/Justification

Suggestion

27.

Profits and gains of business or profession (Section 28)

In the recent supreme court ruling in Rayala corporation

(P) ltd V. ACIT reported in 72 TAXMAN 149 it has been decided that

“where assessee company was having house property and its business was to lease out its property and to earn rent, income so earned as rent should be treated as 'business income', and not as 'income from house property'”.

The Finance Act may consider the aforesaid decision and enact a suitable provision for treating certain rental income received by assesses as business income to end the infructuous litigations.

28.

Deduction for maintenance charges paid to societies, federation etc.-

Section 23

In most urban areas, maintenance of building is undertaken by the society, federation, company or common body and the expenses for such maintenance are substantial. The same need to be allowed as deduction against rental income so as to ensure that it is only the real income that is brought to tax. There is a spate of litigation that prevails in the country on account of this item of expense. Amending the law and allowing a deduction for the same would lead to considerable reduction in litigation.

No provision presently exists to allow deduction for maintenance charges paid to a housing society etc even though it is a substantial and recurring expense.

New clause be inserted to provide deduction of maintenance charges paid to Society, federation etc.

Contribution towards

maintenance charges actually paid to society, company, federation or common body should be allowed as deduction.

29.

Section 23(5) – Deemed Taxability of unsold stock of house property after 1 year of lying vacant

– Non-applicability of restriction contained in section 71(3A)

The Finance Act 2017 inserted sub-section (5) in existing section 23 to provide that where the house property consisting of any building and land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period upto one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil. The same is being done considering the business exigencies in case of real estate developers and would provide much needed relief to such assessees.

Another related amendment has been made in section 71 by insertion of sub-section (3A) so as to provide that set-off of loss under the head "Income from house property" against any other head of income shall be restricted to two lakh rupees for any assessment year.

Now an issue has arisen in case of assessees engaged in the business of real estate sector. Normally, the interest which the builder assessee pays on borrowings which were taken for construction purpose is allowable under section 36(1)(iii) as his income is assessable under the head business and profession. However, on a combined reading of provisions as contained in section 23(5) and 71(3A), i.e., if the notional income is to be treated as “Nil” during the period of one year and thereafter, as income from house property, it appears that the interest deduction would be available under section 24 and consequently, the restriction contained in section 71(3A) would apply. This would create genuine difficulty, since the businesses were so far eligible for deduction of entire interest under section 36(1)(iii). Therefore, the restriction contained in section 71(3A) should not be applicable in the case of interest deduction in respect of income from house property held as stock-in- trade.

Thus, on one hand, the insertion of sub-section (5) to section 23 of the Act deems the annual value of house property held as stock-in trade, as Nil, if the same is not let out; on the other hand, the amendment to section 71(3A) restricts the claim of set off of loss from house property (arising mainly on account of interest deduction) against income from any other head. This would curtail the benefit of entire interest deduction so far available under section 36(1)(iii).

Considering the interest deduction so far available under section 36(1)(iii) in respect of loan borrowed for construction of houses held as stock-in-trade, it is suggested that the restriction as per section 71(3A) may not be made applicable in the case of interest deduction in respect of income from house property held as stock-in-trade. This would go a long way in avoiding any negative impact on the real estate sector.

30.

Deduction for ground rent other than u/s 24(a)

At present, there is no provision for allowing deduction towards ground rent paid in computation of income from house property

& the same has been merged into 24(a). Ground rent shall be allowed as deduction in addition to section 24(a) deduction since 24(a) mainly focuses on repairs & maintenance. The logic behind this suggestion is that the repairs by way of 30% standard deduction cannot accommodate a huge lease rent which may have to be paid if the land is taken on lease & building is constructed by the assessee.

It is suggested that ground rent shall be allowed as deduction in addition to section 24(a)

(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF THE INCOME-TAX ACT)

Sr. No

Section

Issue/Justification

Suggestion

31.

Section 28(iiia) – Sale of license

Section 28 provides for income that is chargeable to income tax under the head “profit and gains from business or profession”. As per sub-section (iiia) of section 28, profit on sale of license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 is chargeable to tax under the head “profit and gains from business or profession”.

It is pertinent to mention that “The Import and Exports Control Act, 1947” as mentioned in section 28(iiia) has been repealed. Further, advance Authorization issued in place of erstwhile advance licenses are not transferable as per the Foreign Trade Policy issued under Foreign Trade (Development and Regulation) Act, 1992.

Since the Import and exports Control Act, 1947 has been repealed and advance Authorization issued in place of erstwhile advance licenses are not transferable as per the Foreign Trade Policy issued under Foreign Trade

(Development and Regulation) Act, 1992, sub-section (iiia) to section 28 be omitted.

32.

Section 28(iiid) – Duty Entitlement Pass Book Scheme no

more in existence

Section 28(iiid) provides that any profit on transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) shall be chargeable to income-tax under the head “Profits and gains of business or profession”. However, the aforementioned DEPB scheme was abolished w.e.f 1.10.2011 vide Notification No. 51/2011 – Customs, dated 22.06.2011.

It is suggested that sub section (iiid) to section 28 be omitted since the Duty Entitlement Pass Book Scheme was

abolished w.e.f.

1.10.2011 vide

Notification No. 51/2011 – Customs, dated 22.06.2011.

33.

Section 32 - Depreciation in case of slump sale

The proviso to section 32 provides that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know- how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the de-merged company and the resulting company in the case of de-merger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the de-merger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the de-merged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.

The following issues may be considered for appropriate amendment in the law :

• issue arises whether depreciation can be claimed on the basis of proportionate number of days by the transferor and the transferee company in case of slump sale considering the proviso to section 32 read with section 170 of the Act.
• per the current provisions of proviso to section 32 the depreciation can be claimed on the basis of proportionate number of days for which the assets were used by the predecessor and the successor, or the amalgamating company and the amalgamated company, or the de- merged company and the resulting company, as the case may be.

Due to practical and administrative difficulties, there may be a time gap between holding of the asset and using the asset so transferred. To avoid genuine difficulties in such cases, instead of the words, “used by them”, the words “held by them” may be substituted in the proviso to section 32.

a) Section 32 may be amended to clarify the legal position as to whether depreciation can be claimed on the basis of proportionate number of days by the transferor and the transferee company in case of slump sale also considering the proviso to section

32 read with section 170 of the Act.

b) Due to practical and administrative difficulties, there may be a time gap between holding of the asset and using the asset so transferred. To avoid genuine difficulties in such cases, instead of the words, “used by them”, the words “held by them” may be substituted in the proviso to section 32.

(SUGGESTIONS TO REDUCE / MINIMIZE LITIGATIONS)

34.

Benefit under Section 35(1)(iia) should be increased to

200 per cent from the present level of 125 per cent

Section 35(2AB) of the Act has been gradually amended to provide increased tax benefits on expenditure incurred towards in-house R&D facilities i.e. from 125 per cent to 200 per cent. However, Section 35(1)(iia) of the Act, which provides tax incentives in respect of payments made to R&D company, has remained same at 125 per cent. The conditions specified by the DSIR for grant of approval for a recognized R&D facility/ company under Section 35(2AB) and Section 35(1)(iia) are the same and hence, the tax benefits provided under Section 35(1)(iia) should be at par with the tax benefits provided under Section 35(2AB) of the Act.

It is recommended that the tax benefits under Section 35(1)(iia) should be increased to 200 per cent from the present level of 125 per cent.

35.

Applicability of Section 35(2AB) of

the Act on expenditure incurred on scientific research carried outside the in-house R&D facility approved by the prescribed authority

In the pharmaceutical Sector, discovery is a lengthy, risky and expensive proposition. In this business environment, necessitated by the current business needs, companies have to incur expenditure towards scientific research outside their Research & Development (R&D) facility for e.g. expenditure incurred outside the approved R&D facility towards clinical trials (including those carried out in approved hospitals and institutions by non-manufacturing firms), bioequivalence studies conducted in overseas CROs and regulatory and patent approvals, overseas trials, preparations of dossiers, consulting/ legal fees for filings in USA for new chemicals entities (NCE) and abbreviated new drug applications (ANDA) as approved by the Department of Scientific and Industrial Research (DSIR) which are directly related to the R&D, etc.

It is suggested that the existing provisions should be specifically clarified to allow weighted deduction in respect of expenditure incurred outside the R&D facility which are sometimes necessitated by the industry's business needs.

Additionally, it could also be provided that where the risk of doing research is assumed by a company, the entire cost of R&D activities (whether outsourced or undertaken in-house) is eligible for weighted deduction in the hands of company undertaking the risk.

36.

IT and ITES sectors should also be entitled to weighted deduction under Section 35(2AB) of

the Act

Currently, there is no clarity whether a company engaged in the business of development and sale of software or providing IT / Information Technology Enabled Services (ITES) services, is eligible for weighted deduction on the R&D expenditure incurred by it.

As per DSIR guidelines amount spent by a recognized in-house R&D unit towards foreign consultancy, building maintenance, foreign patent filing etc. are not eligible for weighted deduction under Section 35(2AB) of the Act. Such expenditure are essential in carrying out research at the approved R&D centers.

It suggested to amend provisions of Section 35(2AB) of the Act to specifically include R&D with respect to the development and sale of software and providing relevant IT/ITES services.

37.

Weighted deduction should be available on expenditure incurred on internally developed intangible assets

The DSIR guidelines provide that eligible capital expenditure on R&D will include expenditure on plant, equipment or any other tangible item only. It also provide that capital expenditure of intangible nature is not eligible for weighted deduction.

It is recommended to provide weighted deduction for expenditure incurred on internally developed intangible assets under Section 35(2AB) of the Act.

It is also recommended that any initial cost paid for acquiring R&D related intangible assets, which are used in the R&D unit should also be allowed for weighted deduction under Section 35(2AB) of the Act.

38.

Extension of the weighted deduction under Section 35(2AB) of

the Act for a further period of 10 more years

The Finance Act, 2015, with a view to phase out weighted deduction under Section 35(2AB) of the Act, restricted the allowability of expenditure incurred on scientific research (other than expenditure in the nature of cost of any land or building) on in-house research and development facility incurred on and from 1 April 2020 to 100 per cent from the existing 200 per cent.

With a view to achieve a growth rate of 8 per cent and put India on the growth trajectory and to ensure having a robust R&D database, it is suggested that the weighted deduction under Section 35(2AB) of the Act should be extended for a further period of 10 years. This would enable the country to be on par with the developed nations which have robust R&D centres fuelling growth in the economy.

39.

Profit linked incentives for specified industries vis-a-vis investment- linked incentives - Section 35AD

Section 35AD of the Act extends investment linked incentives to taxpayers with respect to the capital expenditure incurred for setting up and operation of specified businesses. Further, once investment linked incentive for the capital expenditure is availed under this Section, no benefit shall be allowed in respect of such specified business under Chapter VI- A (Deductions in respect of certain incomes) and Section 10AA of the Act.

The Finance Act, 2016 has amended section 35AD of the Act so as to reduce the deduction from 150 per cent to 100 per cent in the case of a cold chain facility, warehousing facility for storage of agricultural produce, an affordable housing project, production of fertilizer and building and operating hospitals with effect from 1 April 2017.

Deduction under Section 35AD of the Act is an alternate form of accelerated deduction for the capital expenditure in the specified business. However, the cash flows of these capital intensive industries suffer on account of levy of MAT. This is because book profits continue to be higher than taxable profits (given that deduction for capital expenditure is not taken to the profit and loss account other than in the form of depreciation) and hence, MAT is paid by the industry during the incentive period. While MAT is creditable against normal taxes in future, the period for recovery of MAT paid could result in being longer than under profit linked incentives. Further, given the restriction on the years for carry forward of MAT, it is possible that MAT paid in initial years may not be recovered, especially for those taxpayers who have a longer period before reaching break-even.

The profit-linked incentives currently available for

infrastructure and crucial sectors should not only be expanded but also continued till the end of the next Five-Year Plan to encourage investment and growth of India's infrastructure sector.