May 5, 2013 Dear Friends, Mr. Chidambaram has always presented Budgets when growth was strong.

This was his first slump Budget and by this time next year we will know whether his maths works out. The FM has at one stroke partly re-written several DTAA by taxing the buy-back of the shares in the hands of the Indian Companies. This will deny the DTAA benefit and also the tax credit to non-resident investors. He has also sizably increased the taxes on Royalty and FTS. The GAAR has been deferred but not its rigor. The DTC is work in progress and is intended to be based on best international practices and brought back to the parliament before the end of the Budget session. There is a proposal to set up a Tax Administration Reform Commission. A consensus has been reached between the Centre and the States on the introduction of the GST. The FM has promised to come to Parliament with changes in retrospective amendments after resolving the Vodafone row. This note has been modified and updated to cover the last minute amnedments carried out in the Bill in the Parliament. Thanks and regards Anand Mehta Director

A copy is also available on our website http://www.amcount.com & www.amcoportal.com

This material is prepared by Smart Consultants Pvt. Ltd., a Company established under the Indian Companies Act, 1956. While due care has been taken to ensure the accuracy of the information contained herein, no warranty, express or implied, is being made, by Smart Consultants Pvt. Ltd. as regards the accuracy and adequacy of the information contained herein. The information in this material is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. This material is intended only for the use of the entity / person to whom it is addressed and the others authorized to receive it on their behalf. The recipient is strictly prohibited from further circulation of this material.

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Union Budget 2013-14

FINANCE BILL, 2013

HIGHLIGHTS &COMMENTS
SMART CONSULTANTS PVT.LTD.
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Index
Section A- Direct Taxes 1 2 3 4 5 6 7 8 9 10
Agricultural Land Bad Debts Banks Buy-back of Shares Deduction Power Deduction New Workman DTAA Foreign Co. Royalty/FTS GAAR GAAR Mechanism Income : Transfer of Property

11 12 13 14 15 16 17 18 19

Insurance Investment Allowance Property : Interest on Loan Securitization Trust SET SET VDS STT and CTT TDS Venture Capital

Section B Miscellaneous Amendments Section C Finance Bill 2013 Objectives Section D - Rates of Tax on Income

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direct taxes
Sr. No. 1 Sec. 2(1A), ITA IT,2(ea) (b),WTA Highlights 1. It is proposed to modify the following provisions:
a. Sec 2(1A),ITA = Agricultural Income b. Sec 2(14),ITA = Capital Asset c. Sec 2(ea),WTA= Urban Land

Subject Agricultural Land Amended +/w.e.f. AY 2014-15

Satinder Pal Singh (188 Taxmann 54) (P&H), Ashok Shukla(139 ITR 666) (Indore),Lokik Developers (105 ITR 657) (Mum). Of course a question will arise as to where does one get such aerial distance from ? 5. The population of the area will be determined based on the last preceding census whose figures have been published before the first day of the previous year. [NEW] Sr. No. Subject Bad Debts Banks Amended +/w.e.f. AY 2014-15

2
Sec. 36(1)(viii)

2. At the 3 places, the parameters are proposed to be changed Land which is situated within (a) 2, (b) 6 and (c) 8 km, aerially from the local limits of the Municipality having population of
(a) more than 10,000 but less than 1 Lac, (b) more than 1 Lac but less than 10 Lacs; and (c) more than 10 Lacs respectively will be consid ered

to be Agricultural Land. Comments 1. Presently the above parameters are used as under:
a. Sec 2(1A),ITA, situation of the building, income wherefrom is not exempt; b. Sec 2(14),ITA = situation of land , capital gain from which is not exempt; and c. Sec 2(ea),WTA= Urban Land which is taxable.

2. Presently, the land is defined on a combination of distance in km. and population as

(a) land within the local limits of the Municipality having population of more than 10,000 or (b) within 8 km of such areas as may be notified by the CG.

Highlights 1. The bill proposes to insert a new Explanation 2 to section 36(1)(vii) to clarify that for the purposes of the proviso to section 36(1)(vii) and section 36(2)(v), only one account referred to therein is made in respect of provision for bad and doubtful debts under section 36(1)(viia) and such account relates to all types of advances, including advances made by rural branches. Therefore, in terms of the proposed amendment, for an assessee to whom clause (viia) of section 36(1) applies, the amount of deduction in respect of the bad debts actually written off under section 36(1) (vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) without any distinction between rural advances and other advances; Comments 1. Recently, the Honble Supreme Court in the case of Catholic Syrian Bank Ltd. (343 ITR 270) held that the proviso to section 36(1)(vii)applies only to provision made for bad and doubtful debts relating to rural

3. Now, it is been sought to rationalize and bring these parameters within the Act itself. 4. The distance is now defined to be measured aerially or as the crow flies. This shall deal with the controversy created by the decisions in

advances. Thus, it has been interpreted that both the deductions u/s 36(1)(vii) and u/s 36(1)(viia) are independent and separated educations. It has also been interpreted that there are separate accounts in respect of provision for bad and doubtful debt under clause (viia) for rural advances and urban advances and if the actual write off of debt relates to urban advances, then, it should not be set off against provision for bad and doubtful debts made for rural advances. 2. The proposal will overrule such cases. Sr. No. 3 Sec. 115QA/B/C. 10(34A) Subject Buy-back of Shares Amended +/w.e.f. 1 June 2013

Proposed Situation Distribution of Dividend Exempt Buy back of shares Variable

DDT @ 17% Tax 22.66% @

2. In respect of listed shares the provisions of Sec 46A will continue to apply. 3. This will unsettle the position that prevailed hitherto for certain foreign companies with favorable provisions in DTAA that the amount received on buy back of shares is exempt except when the revenue established it to be a case of avoidance of tax in cases of
a. XYZ India 206 taxman 631 (AAR), b. Armstrong world India 349 ITR 303 (AAR), c. A in re 343 ITR 455 (AAR)

Highlights 1. Presently shares brought back by the Company are taxed in the hands of the Shareholders. 2. There could be two types of buy-back.
a. b. In respect of quoted shares In respect of un-quoted shares.

3. As regards (b) above, there is a proposal now to

a. Tax the same on the hands of the Company u/s. 115QA and b. Exempt the same in the hands of the shareholder u/s. 10(34).

4. To an investor, this will mean that the entire proceeds will be taxed and not only the gain (i.e. after deducting the indexed cost). To a non-resident assessee, it will also mean losing the exemption under treaty and also credit in home country. 5. The provisions of this chapter apply: [NEW]
a Only in respect of buy-back which is under section 77A of the 1956 act; b. If such buy-back is carried out by a domestic company; and c. The shares bought back are not listed on any recognized stock exchange in India. In other words, where the buy-back is not under section 77A of the 1956 Act or where the buy- back is by a foreign company or the buy-back is of listed shares, this chapter will not apply and the provisions of section 46A and other applicable provisions of the Act will continue to govern the tax implications. We shall see more about such cases in later paragraphs.

Comments 1. The provisions are on the same lines as Dividend Distribution Tax. However the following table will demonstrate the subtle differences: Non Resident Shareholder Existing Situation Distribution of Dividend Exempt Buy back of shares Taxable but could be exempt under some treaties Unlisted Indian Company DDT 16.22% @

May have to take care of TDS

6. In other words, now the Scheme will work as under: [NEW]

a. A domestic unlisted company that buys back its own shares under section 77A of the 1956 Act is required under section 115QA to pay tax on distributed income as defined therein at the rate of 20% (plus applicable surcharge). b. The term "distributed income" is defined in the Explanation to sub-section (1) of section 115QA to mean the consideration paid by the company on buyback of shares as reduced by the amount which was received by the company for issue of such shares. Thus, if the shares are of face value of Rs. 10 each that were issued at a premium of Rs. 5 per share, and if the consideration for buyback is Rs. 100 per share, then the distributed income would be ` 85 (i.e., Rs. 100 minus Rs. 15) and tax thereon would be Rs. 17 (being 20% of Rs. 85). This tax would be payable by the company in addition to the tax (if any) on its total income. c. The shareholder, on the other hand, enjoys complete exemption from tax under the newly inserted section 10(34A).

of the tax on the difference between the cost of acquisition (Rs. 50) and the issue price (Rs. 15), it is not a tax on income of the shareholder. Such tax cannot, arguably, stand the test of being tax on income so as to be constitutionally valid. d. A shareholder earning capital gains on buy-back was in a position to set off his loss under the head capital gains against the gains on buy-back. However, this new scheme shall not permit set off of such losses, if any. e. Indeed, even though this tax is described as additional income-tax in the hands of the company, the company will not be in a position to set off any losses that it might have incurred in its business against the so called distributed income. This again reinforces the contention that this is not a tax on income at all. f. The income is exempt in the hands of the shareholder. Therefore, in view of section 14A, the shareholder will not be in a position to claim any deduction in respect of expenses that he may have to incur in connection with transfer of the shares. Under section 46A, however, it was possible for the shareholder to claim deduction for such expenses.

7. Various implications of this new [NEW]

provision.

a. Buy-back of shares under section 77A of the 1956 Act is permitted out of: (i) free reserves; (ii) share premium account; and (iii) proceeds of the new issue of shares. Now, a buy-back from items (ii) and (iii) could clearly not be regarded a a distribution of income of the company. Unlike section 115-O which applies to distribution of dividend which is nothing but distribution of income of the company, buy-back in such cases would not be a distribution of income. There is, therefore, a grave doubt as to whether tax on such buyback can pass the test of being a tax on income in order to pass the test of constitutional validity. b. The title of the newly inserted chapter is Special Provisions Relating to Tax on Distributed Income of Domestic Company for Buy-Back of Shares. Indeed, as explained above, in all cases, the tax on the amount paid on buy-back may not qualify as a tax on distributed income of the domestic company. To that extent the title is misleading. c. In the illustration we saw in para 6b above, assume that the shareholder had acquired the shares at a cost of Rs. 50. The shareholder would be liable to tax on capital gains of Rs. 50 (Rs. 100 minus Rs. 50) and that too subject to indexation. 20% tax on long term capital gain would work out to Rs. 10 (ignoring indexation). However, the tax payable by the company under the new provision would be Rs. 17, being 20% of Rs. 85. Clearly this is a case of double taxation. To the extent

8. Was such a provision necessary? [NEW]

a The Explanatory Memorandum explains the reason for this enactment in the following words: Unlisted Companies, as part of tax avoidance scheme, are resorting to buy back of shares instead of payment of dividends in order to avoid payment of tax by way of DDT particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at lower rate. In order to curb such practice it is proposed to amend the Act b. From the above, it seems that the grievance of the law makers is as regards non-taxability and as regards lower rate. Interestingly, lower rate cannot be an issue because, capital gains are taxable at the rate of 30% if short-term and 20% if long-term, whereas, the DDT is chargeable under section 115-O at the rate of 15%! Besides, it is also intriguing to note that if the intention of the legislators

is to bring buy-back at par with dividends, then why the tax rate is 20%. It ought to have been 15%!

9. The real trigger. [NEW]

a. It appears, though not stated in the Explanatory Memorandum, that the real trigger for such an amendment is the ruling of the AAR in the case of A, In re (2012)343 ITR 455(AAR). In that case, an Indian company (the Applicant) was owned predominantly by a Mauritius Company, a US company, a Singapore Company and some minority Indian shareholders. The Applicant had huge accumulated profits. It had not declared any dividend ever since 2003 when the provisions for dividend distribution tax (DDT) were introduced in the Act. It now offered its shares for buyback to its shareholders. Only the Mauritius shareholder agreed to the buy-back. Other shareholders didnt. The Applicant went for an advance ruling on the question whether the Mauritius shareholder will be eligible for exemption from capital gains on buy-back in view of the India-Mauritius DTAA. b. The AAR, took note of the peculiar facts and held in para 15 as follows: In this case, there is no dispute that no dividend had been paid to any of the shareholders after April 1, 2003, on which date section 115-O of the Act was introduced in its present form. The accumulation in the reserves was allowed to be increased considerably. It may be noted that the major shares are held by the A group and only 1.76 per cent of share are outstanding with the general public. The payment of dividend in the normal course by a company making profits would have meant that the applicant would have been obliged pay tax on distribution of profits to its shareholders. Instead of distributing the applicant allowed the reserves to grow. The proposed buy-back, if followed up, would mean that considerable sums would be repatriated to A (M) in Mauritius without the tax on the distributed profits being paid, by resort the distributed profits being paid, by resort between India and Mauritius. In this context, it is significant to note that neither "A" USA nor "A" (S) accepted the offer of buy-back obviously because in the case of one it would have been taxable in India as capital gains and in the case of the other, its taxability would have depended on certain conditions being fulfilled, whereas under the India- Mauritius DTAC, capital gains is totally out of the Indian tax net. There was no proper explanation on the part of the applicant as to why no dividends were declared subsequent to the year 2003 when the company was regularly making profits and when dividends were being distributed before the introduction of section 115-O of the Act in its present form. We are, therefore, satisfied that the proposal before us of buy-back is a scheme devised for avoidance of tax. In fact, it is a colourable device for avoiding tax on distributed profits as contemplated in section 115-O of the Act.

It seems, the legislature wants to prejudge all cases of buy-back of unlisted shares with the same subjective standards and build in an antiavoidance provision with an underlying presumption that all unlisted companies, as part of tax avoidance scheme, are resorting to buy-back of shares instead of payment of dividends in order to avoid payment of tax by way of DDT. There are several questions that bother the genuine taxpayers and would like the legislators to answer before passing this as a law. For example: [NEW] a. What if an unlisted company has declared dividends from year to year, though on a conservative dividend policy ploughed back significant profits and augmented its reserves? Why should such companies also be labeled as tax avoiders as is sought to be done by the Explanatory Memorandum? b.. What if all the shareholders agree to buy- back, irrespective of whether they are located in a tax friendly jurisdiction or not? Why should they be labeled as tax avoiders as is sought to be done by the Explanatory Memorandum? c. What if minority shareholders have incurred some losses under the head capital gains and by this mechanism they are precluded from adjusting such losses and yet, the exchequer collects full amount of tax only on this transaction of buy-back? d. The Companies Act recognizes the difference between a dividend and a buy-back. The legal requirements and the effects of the two are different. Then why should the Income-tax Act refuse to recognize that difference? And finally, why should the same gain suffer tax twice, once in the hands of the shareholder (see paragraph 4(c) above) and again in the hands of the company?

10 Unintended Effects?.

11 Cases to which this Chapter shall not be applicable [NEW] Some of the instances where this chapter shall not apply could be: a. Where the shares are purchased by the company pursuant to the scheme arrangement under sections 391 to 394 of the 1956 Act such buy back is not one under section 77A and hence its taxability will continue to be governed by section 46A; b. Where the shares are cancelled pursuant to the provisions for reduction of capital under section 77 read with 100 of the 1956 Act this also is not a buy-back under section 77A. The amount received, to the extent of accumulated profits will be taxed as dividend under section 2(22)(d) of the Act; c. Where the shares bought back are those of an unlimited company as unlimited companies are not governed by section 77 and hence are able to reduce its capital independent of any requirements of section 77A of the 1956 Act; d. Where the shares bought back are of a foreign company the normal capital gains provisions read with the relevant tax treaty provisions shall continue to govern taxation of such buy-backs; e Where the shares bought back are of a listed company; f. Redemption of preference shares at a premium this will continue to be charged as capital gains in view of the decision of the Supreme Court in the case of Anarkali Sarabai vs. CIT 224 ITR 422 (SC). g. Conversion of preference shares into equity or equity into preference such conversion is generally treated as transfer for tax purposes [see Addl. CIT vs. Trustees of HEH Nizams Family Trust (1976) 102 ITR 248(AP) and hence liable to capital gains tax. 12. Concluding remarks [NEW] The tendency of robbing Tom to pay Peter, is becoming more and more popular. We already have section 115-O where the tax on income of the shareholder is made the responsibility of the company itself and section 115R where the tax on

income of the unit holder is made the responsibility of the mutual fund. We now have section 115TA where the tax on income distributed to investors is the responsibility of the securitization trust and we have this section 115QA, where the tax on capital gains of the shareholder is now the responsibility of the company buying back the shares. With these provisions, coupled with the expansion of scope of the TDS provisions, I hope that in March 2014, we will get no phone calls from the pay more advance tax on the 15th of March so that their targets are met! Sr. No. 4 Sec. 80IA(4) Subject Deduction - Power Amended +/w.e.f. AY 2014-15

Highlights 1. The Sunset Clause has been extended from 31st March 2013 to 31st March 2014. Comments 1. This time limit applies to undertakings which commence their business of generation and / or distribution, transmission or distribution of power, complete substantial renovation and modernization of the existing transmission or distribution lines on or before this date. Sr. No. 5 Sec. 80JJAA Subject Deduction New Workman Amended +/w.e.f. AY 2014-15

Highlights 1. The present provision deduction is being modified explained below:

for as

a. Eligibility: Profits and Gains derived from an Industrial undertaking changed to Manufacture of Goods in a Factory

b. Dis-qualification now includes the factory which is hived-off or transferred from another company.

Comments The provision was originally intended only for creation of employment for the blue collar employee. However, it has been used for other sector also. The proposal speak to make the correction.

Sr. No. 7 Sec. 115A

Subject Foreign Co. Royalty/FTS Amended +/w.e.f. AY 2014-15

Highlights 1. Uniform increased rate of 25% (plus SC/EC). 2. Applicable to non-residents and foreign companies not having a PE in India. Comments 1. At present various rates were applicable depending on the period during which the Agreement was entered-before 31/5/1997 (30%) between 31/5/.19975 and 1/6/2005 (20%) and after 1/6/2005 (10%). Now, for all Agreements after 31/3/1976, there will be uniform rate of tax of 25%. 2. The rationale given is that the tax rates were lower than those provided in a number of DTAAs. 3. Of course, the rate is subject to benefit under DTAA. 4. However, admittedly the rise is really steep and the burden may be passed on to the Indian Companies after all. Sr. No. 8 Sec. 95 102 Highlights 1. The department can apply GAAR in addition to a. b. 2. SAAR or Any other Provision. Main Steps in GAAR Avoidance +/Subject GAAR Amended w.e.f. AY 2016-17

Sr. No. 6 Sec. 90/90A +/-

Subject DTAA Amended w.e.f. AY 2013-14& AY 2016-17

Highlights 1. There are two situations of Double Taxation Relief.

a). In respect of Agreement between countries u/s. 90 and b) In respect of Agreement between Associations u/s. 90A.

2. There are changes proposed for both the situations;

a) Under proposed Sec.90(2A)/90A(2A), the provisions of GARR will have to be read into the Agreement even if the same are not beneficial to the Assessee. b) Under proposed Sec. 90 (5)/90A(5) the Tax Residency Certificate (TRC), shall be a necessary but and a sufficient condition. [NEW]

3. These proposal should applicable as under:

a) In respect of 2a) above, w.e.f AY 2016-17

b) In respect of 2b) above, w.e.f. AY 2013-14

Comments 1. This will overrule the decision of the Supreme Court in the case of Azadi Bachao Andolan (263 ITR 706)(SC). 2. There was a controversy and uproar and while passing the Financial Bill finally, the Finance Minister moved an amendment to ensure that the TRC is sufficient proof of Residence. [NEW]

a. Show Impermissible Arrangement. b. Determine Consequences. Show Impermissible Arrangement.

Avoidance

3.

Impermissible Avoidance Arrangement.

a. There is an Arrangement b. The main purpose=Tax Benefit ---- and ---ca. Creates Rights/Obligations beyond Arms Length cb. Results in misuse or abuse of Act cc. lacks Commercial Substance cd. manner not bona fide

where the following are relevant but not sufficient considerations.

a. b. c. Period for which it exists. Taxes are paid. Exit route is provided.

7. Round Trip Financing

a. b. Series of fund transfers. No substantial commercial purpose.

4. Arrangement
means a. Any step in or any part or whole of b. Any transaction, operation, scheme, agreement or understanding c. Whether enforceable or not and includes d. the alienation of any property in such transaction, operation, scheme etc.

8. Accommodation Party.
a. Purpose is to obtain Tax benefit.

Deal with the IAA 9. Main thrust

a. Consequences b. Manner

5. Tax Benefit a. Includes aa. Reduction, avoidance, deferral of tax or other amount payable ab. as per the provisions of the Act or a Treaty b and also includes ba. reduction in total income or bb. increase in loss c. For determining whether a Tax benefit exists.
ca. Many parties = one party. cb. Accommodating Party = Main Party. cc. a and b = one party. cd. Corporate Veil= No Veil

10. Consequences include denial of tax benefit or benefit under a treaty. 11.Manner could be such as deemed appropriate and may include the following:
a. Many steps = one step. b. IAA = no arrangement. c. Disregarding the accommodating party. d. Connected persons = one person.

For this purpose,

a. Equity = Debt and vice versa b. Capital = Revenue Item and vice versa c. Expenditure/Reduction can be recharacterized.

d. If the main purpose of even a step in or the part of an arrangement is to obtain tax benefit, the whole of the arrangement shall be presumed to have been carried out for the main purpose of obtaining tax benefit unless proved to the contrary by the Assessee. 6. Lacks Commercial Substance, if
a. substance different from form; or b. Involves Round Trip Financing, An Accommodating Party, off-setting elements, conduit and disguise true value, location, source, ownership and control of funds. c. Without substantial commercial purpose. d. Without significant effect on the business risk or net cash flow.

12. Terms defined.

a. b. c. d. e. f. g. h. i. j. Arrangement. Asset Benefit Connected Person Fund Party. Relative Step Tax benefit. Tax Treaty

13. CBDT is authorized to prescribe guidelines and conditions for applying this chapter. Comments: In order to give effect to the recommendations the following amendments have been made in GAAR provisions currently provided in the Act: 1. The following are detailed differences between the current provisions and the proposed
changesa. The provisions of Chapter X-A and section 144BA will come into force with effect from April 1, 2016 as against the current date of April 1, 2014. b. An arrangement, the main purpose of which is to obtain a tax benefit, would be considered as an impermissible avoidance arrangement. The current provision of section 96 providing that it should be "the main purpose or one of the main purposes" has been proposed to be amended accordingly. c. The factors like, period or time for which the arrangement had existed, the fact of payment of taxes by the Assessee; and the fact that an exist route was provided by the arrangement would be relevant but not sufficient to determine whether the arrangement is an impermissible avoidance arrangement. The current provisions of section 97 which provided that these factors would not be relevant has been proposed to be amended accordingly. d. An arrangement shall also be deemed to be lacking commercial substance, if it does not have a significant effect upon the business risks, or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained but for the application of Chapter X-A. The current provisions as contained in section 97 are proposed to be amended to provide that an arrangement shall also be deemed to lack commercial substance if the condition provided above is satisfied. e. The Approving Panel shall consist of a Chairperson who is or has been a Judge of a High Court; one member of the Indian Revenue Service not below the rank of Chief Commissioner of Income-tax; and one Member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices. The current provision of section 144BA, that the Approving Panel shall consist of not less than three members being income-tax authorities and an officer of the Indian Legal Service has been proposed to be amended accordingly. f. The directions issued by the Approving Panel shall be binding on the Assessee as well as the income-tax authorities and no appeal against such directions can

be made under the provisions of the Act. The current provisions of section 144BA providing that the direction of the Approving Panel will be binding only on the Assessing Officer have been proposed to be amended accordingly. g. The Central Government may constitute one or more Approving Panels as may be necessary and the term of the Approving Panel shall be ordinarily for one year and may be extended from time to time up to a period of three years. The provisions of section 144BA have been proposed to be amended accordingly. h. The two separate definitions in the current provisions of section 102, namely "associated person" and "connected person" will be combined and there will be only one inclusive provision defining a "connected person". The provisions of section 102 have been proposed to be amended accordingly. i. Consequential amendments in other sections relating to procedural matters are also proposed.

2. Right from the day the proposal was made in the Parliament. It again became subject matter of discussion and one is not sure as to when and what will be the final shape of things? Will it meet the same fate as the DTC, the Companies Bill and the GST which are being discussed over the last several years but no concrete shape as evolved. 3. A balance of consideration must evolve in respect of GAAR vs. SAAR. the following are the specific instances of SAAR.
a. Section 40A(2) Expenses or payments are not deductible in certain circumstances involving related parties. b. Section 80-1A(8) Market value concept to be followed in relation to transactions with tax exempt entities. c. Sections 92 to 92F Transfer Pricing Regulations applicable to international transactions, which have also been made applicable to domestic transactions by the Finance Act, 2012.

d. Section 93 Avoidance of Income-tax by transfer of income to non-residents through transfer of assets, rights or interest. e. Section 94 Avoidance of Income-tax by transactions in securities assets, rights or interest. f. Section 94A Transactions with persons located in notified jurisdictions. g. Section 2(22)(e) - Deemed dividend.

Comments There is an elaborate procedure to ensure that full justice is done while implementing GAAR. Sr. No. 10 Sec. 43CA/56(2) Subject Income : Transfer of Property Amended +/w.e.f. AY 2014-15

h. 40(a)(ia) Disallowance of expenses for nondeduction of tax at source. i. Section 9 Scope of Income deemed to accrue or arise in India, Vide the Finance Act, 2012, it scope has been widened to overrun the Supreme Courts ruling in Vodafone and some other cases.

Highlights 1. There are two changes in respect of deemed income on transfer of an immovable property.
a. Deemed Gain in hands of seller It is proposed to introduce Sec. 43CA, to deem incase of transfer of asset other than Capital Asset, being Land and/or Building, the Stamp Duty value to be the full value of consideration b. Deemed Income in the hands of recipient: It is proposed to modify sec. 56(2)(vii)(b) to cover transfer of any immovable property without consideration or without adequate consideration.

j. Section 43(1) Explanations 1 to 13 Determination of actual cost of assets ignoring agreements etc. in certain cases. 4. Tax treaties also provide certain antiavoidance rules which may be considered to be SAAR. For instance, Limitation of Benefit (LOB) Clause and concept of beneficial ownership.

Sr. No. 9 Sec. 144BA

Subject GAAR Mechanism Amended +/w.e.f. AY 2016-17

2. In both the cases, where there is a time gap between the date of Agreement and the date of Registration, the former date will be applicable. This of course will be applicable if the payment is made before the former date. Comments

Highlights 1. The present section 144BA substituted by a new Section. 2. The procedure in brief is as under:

has

been

1. Sec 43CA is import of Sec. 50C, applicable to a Capital Asset to the case of Current Asset. 2. This will overrule the decisions in the cases of
a. KAN Constructions (ALL) 20 Taxmann. Com 381 b. Tiruvendgudem investment PLimited (320 ITR 345(Mad) c.Excellent Land Developers Limited ( 1 ITR 563 (Trib) (Delhi). d. K.R. Palanisamy (180 Taxman 253) (Mad)

a. AO makes a reference to CIT b. CIT if he concurs with AO to issue notice to A c. If A does not object, CIT can issue directions d. If an objects, CIT to make reference to Approving Panel (AP) e. AP makes inquiries and issues directions f. Directions of AP final, not appealable. g. AO proceeds to make the order h. AO gets approval of CIT if tax determined i. A can appeal to ITAT against AO but not to DRP.

2. Sec 56(2)(vii)(b) extends the original law which was applicable only if there was no consideration to a case where there is a consideration but there is a shortfall. This may overrule the decisions in cases of a. Vallabhbhai(27 taxmann. Com 306)( AHD) b. Harley Street (38 SOT 486)( Ahd) c.Khoobsurat Resorts (P)Ltd (211 Taxman 510) (Del). d.Suzaina foods (P) Ltd. (ITA No. 2731/Ahd/2010)

10(10D) +/AY 2014-15 . Highlights 1. There are two types of Insurance which are covered.
a, On persons with disability (refer Sec. 80U) disease (refer Sec.80DDB) b. On the Keyman

3. There could be genuine difficulties in the case of a distress sale. The FM may clarify that once income is taxed u/s 56, it will not be again taxed u/s 69 as unexplained investment. 4. This will import various controversies u/s. 50C.including whether it applies to transfer of tenancy rights, whether the value given by a Valuation Officer is final or some amount of leeway is possible and whether a reference to a Valuation Officer is mandatory in cases where the Assessee pleads that the Fair Market Value is lower than Stamp Duty Values. All these and more controversies will continue while determining business income as well. 5. In cases where the date of fixing the value of the agreement precedes the date of registration and some amount of consideration has been discharged on or before the date of such agreement, otherwise than in case, then the Assessee is now given the right to plead that the stamp duty value on the date of the agreement fixing the price be adopted rather than the value on the date of registration - and this would be a beneficial provision for an Assessee. 6. The above amendment would have a ramification in computing business income particularly because income from real estate transactions is often computed using the percentage completion method. 7. Further, it does appear that immense importance is being given to stamp duty values which re revised in an ad hoc manner at the beginning of every financial year. Sr. No. 11 Sec. +/Subject Insurance Amended w.e.f.

2. As regards (a) above, there are two events which are relevant in this regard.
i). Payment of the Insurance Premium. ii). Receipts of the Insurance Proceeds.

In both these events i) and ii), present sections 80C and 10(23D) exclude Insurance where the premium is more than 10% of the sum insured. It is proposed to change this limit to 15%. 3. As regards (b) above, it has been provided that the assignment of such policy will not make any difference. Comments 1. As regards (a) above, the benefit has been increased. 2. As regards (b) above, a benefit was conferred in the cases of a. Rajan Nanda (349 ITR 1)(Del), b. Escorts Heart Institute (30 taxmann.com 4) (Del) that if the policy is assigned to the beneficiary, it ceases to be a Keyman Policy and accordingly the proceeds will be exempt u/s 10(23D). This is now taken back. Sr. No. 12 Sec. 32AC,ITA Subject Investment Allowance Amended +/w.e.f. + A.Y. 2014-15

Highlights. 1. This is a new provision on the lines of the former section 32AB of Investment Allowance. 2 The eligibility criteria is as under:

a. The Assessee is a Company. b. Engaged in manufacture of Article or thing. c. It acquires a new asset. d. Which excludes office appliances or machinery installed in Office, vehicles and those items which have been fully written off in the year of purchase itself. e. Such assets are acquired from 1/4/2013 to 31/3/2016. f. The cost of such assets is more than Rs.100 Cr.

is less than Rs 1,00,000, the balance will be deductible in the AY 2015-16. Comments 1. This deduction is over and above the deduction of Rs 1,50,000 in respect of interest on loans for self occupied house u/s 24(b). Sr. No. 14 Sec. 10(23DA/10(35A)/ 115TA Subject Securitization Trust Amended +/w.e.f. 1/6/2013.

3. The deduction is @ 15% of such cost which is allowed in the second year if the test of Rs 100 crores is met in that year. 4. If the asset is sold within a period of 5 years, the deduction is withdrawn. This provision does not apply to transfer in the course of amalgamation or demerger but the successor company has to finish the balance of the 5 year tenor. Comments 1. The deduction under this section is in addition to depreciation and additional depreciation admissible u/s 32. 2. It is not deductible for MAT u/s 115JB. 3. In the year of sale within 5 years, the taxability mentioned earlier will be over and above the Capital Gains tax. Sr. No. 13 Sec. 80EE Subject Property : Interest on Loan Amended +/w.e.f. AY 2014-15

Highlights 1. Various amendments are proposed for a Securitization Trust (ST).

a. Sec 10(23DA) to exempt any income of ST b. Sec 10(35A) to exempt income from ST c. Sec 115TA, to tax distribution by ST

Comments 1. There are two places where Securitization has been approved:
a. SEBI (Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008; and b. Guidelines on Securitization of Standard Assets issued by the RBI.

2. Under the new scheme:

a. Any income of a ST is exempt b. When ST distributed income, ST itself has to pay tax at 25%/30% depending whether the receiver is other than a company or a company; c. Such income is exempt in the hands of the receiver.

Highlights 1. A new deduction is proposed for a new housing loan. 2. The following are the conditions:
a. Assessee is an individual. b. Loan sanctioned between 1/4/13 and 31/3/14. c. Loan does not exceed Rs. 25 Lacs. d. The value of the house does not exceed Rs. 40 Lakhs. e. The Assessee does not own any other house. f. The loan is from a Financial Institution or a Housing Finance Company.

3. This scheme is similar to the present scheme of taxation in case of mutual funds. 4. Background [NEW]
a. "Secularization" is a financial transaction in which assets are pulled and securities representing interest in the pool

3. It is basically a one-time deduction of amount up to Rs. 1,00,000. If the interest for AY 2014-15

are issue to the investors representing undivided interest in such assets. b. A company which has given large number of loans against the assets and wants to further expand the business has three options - either to borrow or to infuse the more capital or by selling interest in the existing loan accounts in the pool to the investors. These existing loan accounts are pooled as "portfolio" and transferred to a separate company/ trust known as Special Purpose Vehicle (SPV). The investors invest into the SPV for the purpose of funding the purchase of portfolio. This activity is known as Securitization. In case of securitization, risk and reward of portfolio loans are transferred to SPV and therefore, to the investors. For investors, securitization creates diversified pool or portfolio which can generate higher rate of return as well as the positive difference between the acquired price of portfolio and future realization. c. In typical example, owner (originator) of the Financial Assets sells those assets to a SPV to whom the cash flows from the financial assets transferred. The SPV subsequently distributes the collection and income generated from the assets to the investors of that SPV. Generally, the SPV is a trust from where income passes to the investors.

a. Transactions of Securitization of Standard Assets as regulated by RBI (Bank and NBFCs) b. Transactions of Securitization where securities are listed on Stock Exchanges. c. For such qualifying transactions, the following are implications. * Any income of securitization trust from activity of securitization is exempt (10(23DA).) * There are no tax on income of an investor by virtue of section 10(35A). * The trust has to pay tax on distributed income (section 115TA)

7. The out-reach [NEW] The provisions pertaining to Securitization are laid down in three different sections inserted in the Finance Bill. i.e. (1) 10(23DA),(2) 10(35A) and (3) 115TA to 115TC.
a. As per Section 10(23DA)- any income of a securitization trust from the activity of securitization is exempt. These terms have to be understood from Securities and Exchange Board India (Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008 Para 2(1)(r) and RBI Guidelines on Securitization of Standard Assets b. Section 10(35A) any income by way of distributed income referred to in section 115TA received from a securitization trust by any person being an investor of the said trust is proposed to be exempted. c. Sections 115A to 115C provide the scheme of taxation. The tax is basically on the amount of income distributed @ 25%/30% depending on the recipient. It has to be paid within 15 days on a gross amount and the usual terms like furnishing of statement, consequences of failure to pay and recovery thereof apply.

5. The need [NEW] The Finance Bill, 2013 proposes to introduce special provisions relating to taxation of income of securitization entities, set up as trusts and distribution of income by them to the investors. Securitization trusts have been defined to mean a trust being a
a. Special purpose distinct entity regulated under the SEBI (Public Offer and listing of Securitized Debt Instruments) Regulation, 2008 and, b. Special Purpose Vehicle regulated by the guidelines on securitization of standard assets issued by Reserve Bank of India. c. The securitization industry has been facing several taxation issues. At times, the investor of the SPV are Mutual Funds, and if the Mutual Fund Income is exempt, whether SPV (Trust) shall be liable (to the extent of share of Mutual Fund) to tax or not was always a question. The litigation was on, however the Finance Bill has attempted to address this litigation.

6. The coverage [NEW] From the provisions of Finance Bill, it appears that following transactions of securitization may qualify under relevant provisions.

11. An evaluation [NEW]

a. The object of introducing this chapter is to put to the rest litigation issues regarding taxation of securitization trusts, which in one opinion is not fully achieved. One will have to wait for notifications, clarifications and final enactment.

b. Section 10(23DA) and section 10(35A) are applicable from 1st April, 2013 and additional taxation scheme on distributed income under Chapter XII EA is applicable from 1st June 2013, the effective date will always be 1st June 2013. Any distribution prior to this date will continue to be governed by existing provisions. c. The additional income distribution tax to be paid by securitization trust is 25% plus surcharge for distributed income in case investors are individuals and HUF and 30% plus surcharge if distributed income in other case. d. In case the Investors are individuals, HUF, there is apparent disadvantage for not getting benefit of basic exemption limits. This is because SPV has to bear the tax at 25% +SC flat. Even the expenses cannot be deducted by the investors as the income the provisions of section 14A and rule 8D in relations to the exempt income received through distributed income. e. It is also not known why the words additional income distribution tax has been used? f. The amount of additional tax is on the income distributed to the investor. How the same will be calculated is again going to be a debate as normally the distribution amount encompasses capital component accumulation of income and the income out of activities other than securitization also. If the distribution is in parts whether the initial payments would be considered as a repayment of capital or income or proportionate of both, may lead to litigation. g. Though there is a direct relief for mutual fund industry, whether securitization industry as a whole will revive or not, has to be seen.

3. Amendment to Negative List: w.e. f the date of enactment of the Finance Bill. a. Service by way of education, as part of
an approved vocational education course, is a negative list item and hence not liable to service tax. The definition of approved vocational course in section 65B(11) is being proposed to be changed to include courses run by an industrial training institute or an industrial training centre affiliated to State Council for Vocational Training and to delete courses run by an institute affiliated to the National Skill Development Corporation. b. Any process amounting to manufacture or production of goods is a negative list item and hence not liable to service tax. The definition of process amounting to manufacture or production in section 65B(40) is being expanded to include processes under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955. c. The negative list entry in sub-clause (i) of clause (d) of section 66D is being modified by deleting the word seed. This will allow the benefit to all other testing in relation to agriculture or agricultural produce.

Comments The above explanatory. Sr. No. 16 Sec. VCES

provisions

are

self-

Sr. No. 15 Sec. Various +/-

Subject SET Amended w.e.f.

+/-

Subject SET VDS Amended w.e.f. Enactment of the Bill

Highlights 1. Rate of Service-tax: There has been no change in the rate of service tax and the effective rate of service tax remains unchanged at 12.36%. 2. Abatement w.e.f 1-3-2013 : the abatement available for construction of a complex, building, civil structures etc. is being reduced from the existing 75% to 70% for construction other than residential properties having a carpet area upto 2000 sq. ft or where the amount charged is less than Rs. 1 Crore.

Highlights 1. There is a new scheme to be called Service Tax Voluntary Compliance Encouragement Scheme,2013(VCES) 2. Objectives:
a. to encourage voluntary compliance by the defaulters, who have failed to declare true liability or have not paid their service tax dues,

b. to provide one time amnesty by way of waiver of interest, penalty and immunity from prosecution.

c. prosecution d. any other proceedings under the Act. 7. Obligations of the declarant: a. Filing of declaration In the prescribed form to the designated authority on or before 31st December 2013. b. Payment to be made under the scheme: ba. Not less than 50% of the declared tax dues by 31st December, 2013 bb. The remaining amount of tax dues on or before 30th June, 2014. If such amount is not paid by 30th June, 2014, the same may be paid by 31st December 2014. In such a case interest is to be paid at applicable rate from lit July, 2014 till the date of payment bc. Furnishing details of payment made from time to time under this scheme along with a copy of acknowledgement of the declaration to the designated authority

3. Commencement: VCES comes into force from the date of enactment of the Finance Bill 4. Tax Dues covered:
a. Service tax due or payable under the Act or any other amount due or payable under section 73A for the period in October 2007 to 31st December 2012. b. In other words, the tax payable by the declarant for the month of January, 2013 and the subsequent months are not covered by VCES

. 5. Eligibility: Any person

a. liable for registration but not registered b. If registered, ba. has not filed service tax return or bb. failed to disclose his true liability In the returns c. However, the following persons are not eligible,

8. Other Points:
ca.Any person to whom any notice or order of determination of liability is issued under section 72 (Best Judgment assessment), section 73 (Recovery of service tax) or section 73A (amount collected as service tax but not deposited) before in March, 2013; cb. Any person who has disclosed his true liability In the returns filed but has not paid the disclosed amount of service tax or part thereof; cc.If a person has been Issued any notice or order of determination earlier, he is not eligible to avail the benefit of the scheme for the tax dues pertaining to any subsequent period on the same issue covered in the notice or the order. cd. Where an inquiry or. investigation is pending as on 1st March 2013, in respect of non-levy, non-payment, short payment or short levy of service tax, initiated by way of search of premises, issue of summons, requirement of production of accounts, document or other evidence or cd. Audit initiated and pending as on March 2013 6. Immunity granted: Once a declaration is accepted and tax dues are paid along with interest, the declarant shall get immunity from: a. Interest b. penalty a. The designated authority shall issue an acknowledgment of: aa. the declaration flied; ab. discharge of declared dues in the manner to be prescribed. b. Where the Commissioner of Central Excise has a reason to believe that the declaration made under this scheme is substantially false, he shall, for reasons recorded in writing serve a show cause notice on the declarant in respect of the tax dues not paid or short paid. c. No show cause notice can be Issued after the expiry of one year from the date of declaration. d. If the declarant fails to pay any tax dues, either full or in part, as declared by him, such dues along with interest thereon shall be recovered under normal recovery proceedings under the Act. e. Any amount paid under the declaration shall not be refunded under any circumstances.

Comments

This is a VDS option which may put the past issues at rest for many innocent assessees.

reference to weather and having a bearing on the commodity sector. 3. The CTT will be levied from a date to be notified in the Official Gazette.

Sr. No. 17 Sec. 105 24,FA13 36, ITA +/-

Subject STT and CTT Amended w.e.f. 1-6-2013

Highlights 1. There is a proposal to reduce the rates of STT at various levels

a. From 0.1% to Nil % in respect of Delivery based purchase of units of an equity oriented fund entered into in a recognized stock exchange levied on a purchaser. b. From 0.1% to Nil % in respect of Delivery based sale of units of an equity oriented fund entered into in a recognized stock exchange levied on a Seller. c. From 0.02% to 0.01% in respect of Sale of futures in securities levied on a Seller. d. From 0.25% to Nil % in respect of Sale of a unit of an equity oriented fund to the mutual fund levied on a Seller.

4. Recognized Associations have not been defined under the bill. However, the bill provides that the words and expressions used but not defined in this chapter and defined in the Forward Contracts (Regulations) act, 1952, the Income-tax Act, 1961 or the rules made thereunder, shall have the same meanings respectively assigned to them in those Acts. Section 2(j)of the Forward Contracts (Regulations) Act,1952 defines Recognized Association as follows: 5."Recognized Association" means an association to which recognition for the time being has been granted by the Central Government under Sec. 6 in respect of goods or classes of goods specified in such recognition. 6. All the Association concerned with the regulations and control of business relating to forward contracts in commodities, which are notified u/s. 15 of the Forward Contr4acts (Regulations) Act, 1952 have to obtain recognition from the Central Government. 7. At present 22 exchanges are recognized /registered for forward/futures trading in commodities. 8. Every recognized association shall collect the CTT from the seller who enters into taxable commodity transactions in or through the recognized association. 9. CTT collected during any calendar month will have to be paid by recognized association by the seventh day of the month immediately following the said calendar month. 10. In addition to above, provisions related to filing of returns rectifications, assessments, appeal,

2. There is a new levy in the form of Commodities Transaction Tax (CTT). It is levied in respect of Sale of commodity derivative entered on a recognized association at a rate of 0.01% payable by Seller. 3. A deduction is provided u/s. 36(1)(xv) from the Profit and Gains of Business. Comments [NEW] 1 On one hand a new levy is introduced in the form of CTT and on other hand, there is a welcome deduction in an existing levy of STT. 2. CTT will not be applicable on Agricultural Commodities. It will be applicable only on a commodity derivative which as per Chapter VII of Finance Bill means - a contract for delivery of goods which is not a ready delivery contract; or a contract for differences which derives its value from prices or indices of prices of such underlying goods; or of related services and rights, such with

interest and penalty are also prescribed for recognized associations. 11. It may be noted that the budget speech of Finance Minister under para 149 mentions that the trading in commodity will not be considered as a 'speculative transaction' and CTT shall be allowed as deduction if the income from such transaction forms part of business income. However, the corresponding amendment u/s. 43(5) of the Income-tax Act, 1961 related to speculative transaction has not been made. 12. The bill also provides that the Centr4al Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this chapter. Sr. No. 18 Sec. 194-1A +/Subject TDS Amended w.e.f. 1-6-2013

As regards Transfer of Immovable Property, the following changes are done. [NEW] 1. The said section aims at encouraging the reporting of immovable property sale transactions. 2. This provision restricts itself to payments made to Resident Transferors since non-resident transferors would be covered by Section 195. 3. A similar provision was proposed to be introduced by the Finance Bill 2012 but was not ultimately included in the Finance Act 2012 and hence one does wonder what the changed circumstances have been to merit a reintroduction this year. 4. The related controversies would be as under:
a. There is no provision as of now to seek a lower or Nil deduction of TDS by making an application u/s. 197 to a Tax Officer. Thus a 1% deduction would be done in all cases so long as the consideration is not less than Rs. 50 Lakhs. b. The said provision therefore does consider that a transferor may have no tax liability if he sells the immovable property at a loss (probably post indexation), invests a sum u/s. 54EC or is entitled to the benefit of reinvestment through Section 54 or 54F or if he has brought forward capital losses for set off. c. The said provision would apply as much to a transferor who holds this as a capital asset as it would to a transferor who holds it as stock in trade and would also apply to situations where payments are made in installments based on stage of completion. In the latter case, the issue of mismatch between year of TDS and year of offering income from tax would also arise. d. A lot of buyers are individuals to whom TDS provisions are not applicable. Such individuals will be required to obtain TANs and comply with TDS provisions including filing of returns. The proposed provisions in the preceding bill provided for a simple

Highlights 1. There are two changes re; TDS.

a. b. Transfer of Immovable Property. Interest to NR/FC from Indian Company.

2. As regards Transfer of Immovable Property,

a. Deductor: The Transferee responsible for paying the consideration. b. Exemption : Consideration <Rs. 50 Lac c. Purpose : Transfer of Immovable Property other than Agricultural Land. d. Timing : At the time of the payment. e. Rate : 1%.

3. As regards interest to NR from Indian Company.

a. Deductor : An Indian Company. b. Deductee: A Non-resident, not being a Company, or a Foreign Company. c. Principal Amount : a Debt received in a Foreign Currency (which now includes as converted from a long term Infrastructure Bond. d. Eligible amount: Interest on the above. e. Rate: 5%.

Comments

one page challan based on PAN but there are no similar provisions in the current proposed amendment. Note - There is a last minutes change while passing the Finance Bill the buyers are exempted from obtaining the TAN/PAN [NEW] e. Mercifully the amendment does not require proof of TDS for registration of the transaction like in the preceding year's proposal.

5. However, for (b) above there are the following sub-conditions:

(a) Not listed on a Stock Exchange. (b) Invested > 2/3rd.in unlisted VCU. (c.) Not invested where Director or a substantial Shareholder holds Equity >15%.

5. Form the government's perspective, they would now be able to collect a 1% tax even in cases where the transaction is not reported and will not be able to chase the transferor as well. Sr. No. 19 Sec. 10(23FB) Subject Venture Capital Amended +/w.e.f. AY 2013-14

Comments 1. Presently the scheme is as under

a. Sec. 10(23FB): exempts income of VCC/VCF b. Sec. 115U taxes the investor directly

2. The SEBI (Alternative Investment Funds) Regulation 2012 have replaced the SEBI (Venture Capital Fund) Regulation 1996 w.e.f. 21st May 2012. 3. The Amendment seeks to extend the benefit to the AIFs, while continuing the original scheme for VCC/VCFs. 4. However, in the process some additional conditions have been stipulated.

Highlights 1. Sec. 10(23FB) Explanation 1, is being substituted by a fresh Explanation. 2. If defines a Venture Capital Company (VCC), A Venture Capital Fund (VCF) and Venture Capital Undertaking (VCU). 3. These definitions use SEBI (Venture Capital Fund) Regulation 1996 (VCFR 96) and the SEBI (Alternative Investment Funds) Regulation 2012 (AIFR 12) which have replaced the former w.e.f. 21st May 2012. 4. A VCC thus means a Company, and VCF means of Fund which have been granted registration as
(a) VCF under VCFR 96 or (b) VCF under AIFR 12

Miscellaneous Amendments
Proposed Section amended Particulars w.e.f.

Income tax Act, 1961 10(23ED) Any income by way of contributions received byan Investor AY 2014-15 Protection Fund from a Depository (NSDL/CDSL). However if any such income is shared with the Depository, the same is taxable. After clause (48), the following clause shall be inserted namely:AY 2014-15 (49) any income of the National Financial Holdings Company Limited, being a company set up by the Central Government, of any previous year relevant to any assessment year commencing on or before the 1st day of April 2014. The deduction has been expanded AY 2014-15 a. Eligibility: Those whose GTI <Rs 12 lakhs b. Scope: Apart from Rajiv Gandhi Equity Savings Scheme(RGESS), it also covers units of an equity oriented fund and ETFs and MFs having such eligible assets. c. deduction uptoRs 25,000 for 3 consecutive years. Now apart from the Central Government Health Scheme, AY 2014-15 contribution to such other schemes as may be notified will also be eligible for the deduction uptoRs 15,000(Rs 20,000 for senior citizens) Donations to National Childrens Fund now eligible for a 100% AY 2014-15 deduction.

10(VII)

80CCG

80D

80G

80GGB/GG Donations to Political Party of Electoral Trust now deductible only AY 2014-15 C if paid by cheque.(Donations to Scientific Research continues to be available for cash donations uptoRs 10,000). 115BBD The benefit of lower tax rate of 15% (plus SC/EC) for dividends AY 2014-15 received by an Indian Company from a foreign company extended by one year.. When an Indian holding company received dividend from a foreign subsidiary and pays tax u/s 115BBD then it will not be made to pay DDT when it in turn distributes dividend. Rate of tax increased from 12.5% to 25% for non-corporate assessees. The tax of 30% on corporate assessees continues. This is done to bring uniformity in MMMF and other MF. Tax At the rate of 5% shall be payable in the case of income distributed by an infrastructure debt fund scheme to a non-resident or a foreign company. The current debate as to whether advance tax payable is an existing liability against which the assets seized in the course of a search can be adjusted or not is settled in favor of the latter. This may overrule the decision in the case of [NEW] Jyotindra B. Mody(Appeal No. 3741 of 2010) (Bom), PandurangDayaramTalmale (187 CTR 625) (Bom) VishwanathKhanna (335 ITR 548)(Del) Ram Sarda V DCIt 50 SOT 121 ( Raj) SudhakarShetty 130 ITD 197 ( Mum). Nilkamal Baburam (2010) SOT 407 (Chd). 1-6-2013

115O

115R

1-6-2013

132B

1-6-2013

Gianchand Gupta (2002) 80 ITD 548 (Del). Raghu Nandan Lal (2002) 82 ITD 436 (Chd). However, a contrary view to the above is also expressed in the following decisions. Ramjilal Jagannath & Ors.(2000) 241 ITR 758 (MP). Goldtax Furnishing Industries (2001) 73 TTJ (Del) 223. In many cases, all the assets of the assessee are seized during the course of search and the assessee is not having sufficient money to make payment of advance tax. In such a situation, the assessee could resort to getting the seized assets adjusted against advance tax liability and could avoid the burden of interest u/ss. 234A, 234B for payment of advance tax when the assets are seized by the department, the above decisions favouring the assessee were of a great help in reducing the interest burden. Further, the courts have also taken a view that the adjustment against the advance tax liability can be made only after the determination of the tax liability u/s. 132(5) and first appropriating the seized assets against the liability arising as a result of search. Accordingly the above amendment could have been avoided since the interest of revenue as regards the tax liability pursuant to search was any way protected, having first charge on the seized assets and adjustment against advance tax was permissible only in respect of the remainder of the seized assets. Explanation 2 is proposed to be inserted with effect from 1st June, 2013. However, it is also stated that the Explanation is sought to be inserted For the removal of doubts. Accordingly it seems that the said Explanation will be applicable to all the applications which are pending as on 1st June, 2013. The amendment would result in additional liability towards interest under sections 234A, 234B and 234C since now the seized assets would not be allowed to be appropriated against the Advance Tax Liability of the assessee. 139(9) [NEW] Now even non-payment of self-assessment tax will make the return defective. The Delhi High Court had held in the case of Sudhir Sareen vs. CIT (2000) 239 ITR 440 (Del.) that the Return of income is treated as defective in a case where the proof of payment of Selfassessment tax is not accompanied with the Return of Income. As per the Explanatory Memorandum, has been noticed that a large number assessees are filing their returns of income without payment of self-assessment tax. The amendment is made with a view to not to permit such practice of filing returns without payment of self-assessment tax. 142(2A) The list of reasons why the AO can direct a Special Audit is being 1-6-2013 1-6-2013

[NEW]

expanded to include apart from the nature and complexity of the accounts, the volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in accounts and specialized nature of business activity of the Assessee. This may take care of cases like DLF Commercial Projects ( Delhi)( 212 Taxman.com 43) As per the Explanatory Memorandum, the expression nature and complexity of the accounts has been interpreted in a very restrictive manner by various courts. The restrictive manner by various courts. The amendment is sought to be made with a view to expand the scope of clause (2A) of section 142. Background In the case of Bata India Ltd. vs. CIT (2002) 257 ITR 622 (Cal), it is held that appointment of special auditor is not justified merely on the ground that some vital information was not ascertainable from the accounts. In Rajesh Kumar & Others vs. DCIT (2006) 287 ITR 91 (SC), the Apex Court observed that the expression complexity would mean the state or quality of being intricate or complex or that it is difficult to understand. Difficulty in understanding would however not lead to the conclusion that the accounts are complex in nature. Further, recently the Bombay High Court in the case of Nickunj Eximp Enterprises Pvt. Ltd. vs, Asst. CIT (2012) 346 ITR 6 (Bom), has observed that the primary requirement of section 142(2A) is a recording of an opinion by the assessing officer having regard to the nature and complexity of the accounts of the Assessee and the interest of the revenue that it is necessary to get the accounts audited in terms of the said section. The assessing Officer must do so before he orders special audit. The High Court further observed that recourse cannot be taken to the provisions of section statutory requirements. Comments The amendment is sought to be made to overcome some stray decisions of Courts where on facts of the relevant cases, the provisions of section 142(2A) were held to be not applicable. With this amendment, the scope of the section 142(2A) will be widened considerably and it will be difficult for an assessee to avoid the special audit on reasoning that the accounts are not complex in nature. The amendment will take within its ambit the situations where the accounts are voluminous or where the assessing officer has doubts about the correctness of the accounts or where there is multiplicity of transactions or specialized nature of business activities. As such, the scope is widened to a great extent. The worst part in the amendment is the reference to doubt about the correctness

of the accounts. In most of the cases, the assessing officer may doubt the correctness of the accounts and in such cases it will be possible for him to order special audit. This will give lot of discretionary powers to the assessing officers and may result in unnecessary hardship to many genuine assessees. Even though, the section has the inbuilt provision of approval of higher authorities, in practical life it is very common for the higher authorities to grant approvals without really going to the merits of the case. Here it may not be out of content to note that usually the special audit is ordered when the assessment about to get time barred. Whether amendment will be applicable to pending assessments? Since section 142 is primarily a procedural provision, the amendment will be also applicable in respect of all the assessments which are pending as on 1st June, 2013. Accordingly the amended provisions can get triggered even for assessments for A.Y. 2011-12 or 2012-13 which may be pending as on 1st June, 2013. Though the amendment is not retrospective, it will certainly be retro operative in that sense. 153/ 153B Period during which assessee challenges the direction of the AO to get the accounts audited and the date the direction was set aside to be excluded from computing period of limitation. Period during which AO makes a reference for information to be excluded from computing period of limitation. 1-6-2013

153D 167C / 179

In case assessee has applied GAAR, then the prior approval will AY 2016-17 be required in the search cases of the CIT and not Joint CIT These sections which permit recovery of tax from the partners/ directors of any tax due from an LLP/PLC. It was held in cases like Dinesh T Tailor (326 ITR 85)(Bom), Maganlal H Patel (26 Taxmann.com 226)(Guj),H.Ebrahim (332 ITR 122)(Kar),Sanjay Ghai (26 Taxmann.com 203) that this term does not cover interest and penalty. The amendment overrides such cases. Benefit of concessional rate of tax of 5% extended to rupee denominated long term infrastructure bonds (and not loans) if the non resident or foreign company has deposited money fin foreign currency in a designated account and such money after conversion into rupees is utilized for subscribing to such bonds. 1-6-2013

194LC

1-6-2013

271FA Sch IV

Failure to submit AIR report after the AO issues notice- the AY 2014-15 penalty increased to Rs 500 per day from Rs 100 per day. For being a Recognized Provident Fund (RPF), the establishment AY 2013-14 for which it has been set up need to be exempt u/s 17 of the Provident Fund Act. The time limit for the same is being extended from time to time. Now it has been extended to 31 st march, 2014. Wealth tax Act, 1957

14A/14B

Wealth tax returns also will be now filed electronically It was clarified that no Wealth Tax was imposed on the Form land. The FM said that it was a unfortunate canard being spread.

1-6-2013

[NEW]

The Finance Bill, 2013 Objectives

As per the memorandum the following are the objectives of the Bill.

Sr 1

Particulars Additional Resource Mobilization

Commodities Transaction Tax (CTT), Taxation of Income by way of Royalty or fees for Technical Services.

2. 3.

Measures to Promote Socio-Economic Growth

Incentive for acquisition and installation of new plant or machinery by manufacturing company.

Relief and Welfare Measures.

Rebate of Rs. 2000/- for individuals having total income up to Rs. 5 Lakhs, Deduction in respect of interest on loan sanctioned during Financial Year 2013-14 for acquiring residential house property, Raising the limit of percentage of eligible premium for life insurance policies of persons with disability or disease, Deduction for contribution to Health Schemes similar to CGHS, Expanding the scope of deduction and its eligibility under section 80CCG, Exemption to income of Investor Protection Fund of depositories, One hundred percent deduction for donation to National Childrens Fund, Exemption to National Financial Holdings Company Limited, Lower rate of tax on dividends received from Foreign Companies, Removal of the cascading effect of Dividend Distribution Tax (DDT), Concessional rate of withholding tax on interest in case of certain rupee denominated long-term infrastructure bonds, Taxation of Securitization Trusts, Securities Transaction Tax (STT), Pass through Status to certain Alternative Investment Funds.

4.

Widening of Tax Base and Anti Tax Avoidance Measures.

Tax Deduction at Source (TDS) on transfer of certain immovable properties (other than agricultural land), Additional income-tax on distributed income by company for buy-back of unlisted shares, Computation of income under the head Profits and gains of business or profession for transfer of immovable property in certain cases, Taxability of immovable property received for inadequate consideration.

5.

Rationalization Measures
General Anti-avoidance rule (GAAR), rationalization of tax on distributed income by the Mutual funds, Enabiling provisions for facilitating electronic filing of annexure-less return of net wealth, Dis-allowance of certain fee, charge etc. in the case of State Government Undertakings, Amendment in the definition of Capital Asset, Keyman Insurance Policy, Contribution not to be in cash for deduction under Sec. 80GGB and section 80GGC, Clarification of the phrase tax due for the purposes of recovery in certain cases, Deduction for additional wages in certain cases, Tax Residency Certificate, Application of seized assets under section 132B, Return of income filed without payment of self-assessment tax to be treated as defective return, Direction for special audit under sub-section (2A) of section 142, Penalty under section 271FA

for non-filing of Annual Information Return, Extension of time for approval in part A of the fourth Schedule to the Income-tax Act, 1961, Clarification for amount to be eligible for deduction as bad debts in case of banks,

The Tax Rates

There are no changes in the tax slabs, rates of income tax or rates of Education Cess and Secondary and Higher Education Cess. Surcharge has been levied/increased as mentioned below: TOTAL INCOME Individuals, HUFs, AoP&BoI, CHS, Firms A.Y. A.Y. 2013-14 2014-15 Nil Nil Nil Nil 10% 10% Domestic Companies A.Y. 2013-14 Nil 5% 5% A.Y. 2014-15 Nil 5% 10% Foreign Companies A.Y. 2013-14 Nil 2% 2% A.Y. 2014-15 Nil 2% 5%

UptoRs 1 cr. >Rs 1 Cr <Rs 10 Cr >Rs 10 Cr

It is the surcharge of 10% which is what is popularly known as Taxing the Rich. The FM has admitted that this will cover only 42800 individuals who were declared income above Rs. 1 Crore. This will have an impact on the expatriate employees also where if the Companies have agreed on a net of tax package, the burden will pass to the Company. Surcharge at the rate of 10% will be applicable on Minimum Alternate tax payable by companies (Section 115JB), Alternate minimum tax payable by persons other than companies (Section 115JC), Dividend distribution tax (Section 115-O), tax on income distributed by Mutual fund (Section 115R), tax on income distributed by Securitization trusts (Section 115TA), and tax on buy back of unlisted shares of domestic companies (Section 115QA).

The effective marginal tax rates will be as under:

Person UptoRs. 1 Crore Individual Firm Domestic Company Foreign Company 30.90% 30.90% 30.90% 41.20%

Total Income Above Rs. 1Cr UptoRs. 10 Cr. 33.99% 33.99% 32.445% 42.024%

Above Rs. 10 Cr. 33.99% 33.99% 33.99% 43.26%

Certain key existing provisions and corresponding amendments in provisions of Chapter X-1 and section 14BA proposed in the Bill are summarized hereunder. At present places reference to the recommendations given by Dr. Parthasarathi Shome Committee ( referred to as "Shome Committee") are given in the Remarks Column. Particulars Existing Provisions Proposed Amendments Remarks Shome Committee recommended GAAR to be effective from A.Y. 2017-18

Effective Dater of Assessment year 2014- Assessment Year 2016-17 GAAR Provisions 15 (Clause 2w4 of the Finance Bill, 2013 Part (A) Meaning of Impermissible Avoidance Arrangement (Section 96 of the Act, Chapter X-A) An arrangement would be an impermissible avoidance arrangement if the "the main p0urpose or one of the main purposes" was to obtain a tax benefit.

An arrangement would be Same as per Shome an impermissible avoidance Committee recommendation. arrangement only if the "main purpose" is to obtain a tax benefit (subject to other prescribed conditions).

actors relevant for determining as to whether the arrangement lacks commercial substance or not. a. Period or time for which the arrangement exists. b. Payment of taxes, directly or indirectly, under the arrangement. c. Availability of an exit route is provided by the arrangement. (Section 97(4).

As per the existing provisions the mentioned factors were not considered to be relevant

As per the proposed Same as per Shome amendments the mentioned Committee recommendation. factor4s are considered to be relevant but not sufficient for determination of commercial substance.

Additional criteria for Not in existence determination of commercial substance of an arrangement. [Section 97(1)(d)]

As per the proposed Same as per amendments, an Committee's arrangement shall be recommendation. deemed to be lacking commercial substance, if it does not have significant effect upon the business risks., or net cash flows of any party to the arrangement.

Shome

Approving Panel The Approving Panel (Section 144BA) shall consists of not less than three members being income-tax authorities not below the rank of Commissioner and an officer of the Indian Le3gal Service not below the rank of Joint Secretary to the Government of India.

The approving Panel is Shome Committee proposed to have the Recommended as follows: following composition. The Approving Panel should a. A Chairperson who is or consist of five members has been a judge of a including Chairman. The Approving Panel should High Court. b. One Member of the consist of five members Indian Revenue3 including Chairman. Service not below the rank of Chief d. The Chairman should be a retired judge of the High Commissioner of Court. income-tax c. One Member who shall e. Two members should be from outside Government be an academic or and persons of eminence scholar having special drawn from the fields of knowledge of directaccountancy, economics taxes, business or business with accounts and knowledge of matters of international trade income-tax practices. f. Two members should be Chief Commissioners of Income-tax; or one Chief Commissioner and One Commissioner. As per the proposed Shome Committee did not amendments, the directions prescribe any such direction. issued by the Approving Panel shall be binding on the assessee as well as the income tax authorities and no appeal against such directions can be made under the provisions of the Act.

Binding nature of The directions issued by directions issued; the Approving Panel [Section 144BA(14)] shall be binding only on the Assessing Officer.

Term of Approving Not prescribed. Panel [Section 144BA(17)]

It is proposed that the term Shome Committee did not of the Approving Panel shall prescribe any such direction. be ordinarily for one year and may be extended from time to time up to a period of three years. It is proposed to combine both the definitions; Comments: However, the definition is inclusive in nature and is not restrictive or definitive as suggested by the Shome Committee. The Shome Committee recommended that the term "Connected Perso9n" may be restricted only to "Associated Enterprise" as defined u/s. 92A of the Act.

Definition of There are two separate 'Associated Person' definitions given and 'Connected person' [Section 102(4)]

Securities Transaction Tax (STT) It is proposed to reduce Securities Transaction Tax (STT) on transactions in specified securities as under: Nature of taxable securities transaction Delivery based purchase of units of an equity oriented fund entered into in a recognized stock exchange Delivery based sale of units of an equity oriented fund entered into in a recognized stock exchange Sale of futures in securities Sale of a unit of an equity oriented fund to the mutual fund Value on which STT payable Price at which units are purchased Price at which units are sold P)rice at which future is traded Price at which units are sold Payable by Purchaser Existing Rates (%) 0.10. Proposed Nil

Seller

0.10.

0.001,`

Seller Seller

0.017. 0.25

0.01. 0.001.

This amendment will take e3ffect form 1st June 2013. The following transactions, the rate of STT has not been changed. For following transactions, the rate of STT has not been changed.

Nature of taxable securities transaction Delivery based purchase of equity shares entered into in a recognized stock exchange Delivery based sale of equity shares entered into in a recognized stock exchange Non-delivery based transactions in equity shares or units of an equity oriented fund entered into in a recognized stock exchange Sale of an option in securities

Value on which STT payable Price at which shares are purchased Price at which shares are purchased. Price at which shares/units are sold Option Premium

Payable by Purchaser Seller Seller

Rates (%) 0.10. 0.10. 0.025.

Seller Purchaser Seller

0.017. 0.125. 0.20.

Sale of an option in securities where option Settlement price of an option exercised Sale of unlisted equity shares under an offer for sale Price at which shares are sold