Impact of Budget Proposals on Taxation of Business
1. Measures for resolution of distressed companies
The existing provisions of section 79 are not applicable to a company where any change in shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (IBC) subject to the condition that jurisdictional Principal Commissioner or Commissioner is provided a reasonable opportunity of being heard. The benefit is also available in case of death of a shareholder or on account of transfer of shares by way of gifts to any relative or in case of amalgamation or demerger of foreign company being shareholder in Indian company. Thus, loss in such cases can be carried forward and set off even if there is change in voting power or shareholding.
This benefit is proposed to be extended to certain other companies where-
(i) the National Company Law Tribunal (NCLT) on a petition moved by the Central Government under section 241 of the Companies Act, 2013 has suspended the Board of Directors of such company and has appointed new directors, who are nominated by the Central Government, under section 242 of the Companies Act, 2013 and
(ii) a change in shareholding of such company, and its subsidiaries and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by NCLT under section 242 of the Companies Act, 2013, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.
(iii) Further, it is also proposed that under section 115JB of the Act for calculating book profit, the aggregate amount of unabsorbed depreciation and loss (excluding depreciation) brought forward shall also be allowed to be reduced in cases of the above mentioned companies.
2. Scope of Section 115QA extended to listed companies
Section 115QA of the Act provides for the levy of additional Income-tax at the rate of 20% of the distributed income on account of buy-back of unlisted shares by the company. As additional income-tax has been levied at the level of company, the consequential income arising in the hands of shareholders has been exempted from tax under clause (34A) of section 10 of the Act.
This section was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends. This practice of widespread abuse was noted, in the past, amongst unlisted companies where the taxpayers preferred it for tax avoidance, as tax rate for capitals gains was lower than the rate of Dividend Distribution Tax (DDT). However, instances of similar tax arbitrage have now come to notice in case of listed shares as well, whereby the listed companies are also indulging in such practice of resorting to buy-back of shares, instead of payment of dividends. In order to curb such tax avoidance practice adopted by the listed companies, the existing anti abuse provision under Section 115QA of the Act, pertaining to buy-back of shares from shareholders by companies not listed on a recognised stock exchange, is proposed to be extended to all companies including companies listed on recognised stock exchange. Thus, any buy back of shares from a shareholder by a company listed on recognised stock exchange, on or after 5th July 2019, shall also be covered by the provision of section 115QA of the Act. Accordingly, it is also proposed to extend exemption under clause (34A) of section 10 of the Act to shareholders of the listed company on account of buy-back of shares on which additional income -tax has been paid by the company.
3. Facilitating demerger of Ind-AS compliant companies
One of the existing conditions for tax-neutral demergers is that the resulting company should record the property and the liabilities of the undertaking at the value appearing in the books of accounts of the demerged company. It has been represented that Indian Accounting Standards (Ind-AS) compliant
companies are required to record the property and the liabilities of the undertaking at a value different from the book value of the demerged company.
In order to facilitate, it is proposed to amend section 2 of the Act to provide that the requirement of recording property and liabilities at book value by the resulting company shall not be applicable in a case where the property and liabilities of the undertakings received by it are recorded at a value different from the value appearing in the books of account of the demerged company immediately before the demerger in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015.
4. Prescription of electronic mode of payments
Income Tax Act through various provisions encourage/ allow payment or receipt only through account payee cheque/ draft/ electronic clearing system through bank account and prohibits cash transactions. Under Section 13A of the act, for the purpose of exemption of donation, a political party is required to receive donation of any amount exceeding Rs. 2000/- through account payee cheque/ draft/ electronic clearing system through bank account.
Under Section 35AD of the Act the term ‘any expenditure of capital nature’ does not include any amount exceeding Rs. 10,000/- in a day, if paid, through any mode other than account payee cheque/ draft/ electronic clearing system through bank account.
Under Section 40A of the Act, expenditure is disallowed if the assessee makes payment or aggregate of the payment exceeding Rs. 10,000/- through any mode other than account payee cheque/ draft/ electronic clearing system through bank account.
Under second proviso to Sub-section (1) to the section 43 of the Act, Actual Cost for the acquisition of asset or part thereof is reduced, by the amount exceeding Rs. 10,000/- in a day paid to a person, if paid through any other mode other than account payee cheque/draft/electronic clearing system through bank account.
Section 43CA of the Act provides that where the date of agreement fixing the value of consideration for the transfer of the asset and the date of registration of such transfer of asset are different, then the full value of consideration for transfer of such asset shall be the stamp duty value on the date of the agreement provided the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account on or before the date of agreement for transfer of the asset.
Similar provision is made in the second proviso to sub-section (1) of section 50C and the second proviso to sub-clause (b) of clause (x) of sub-section (2) of section 56.
Under proviso to sub section (1) of the section 44AD, an eligible assessee engaged in eligible business can opt for presumptive taxation scheme, if he declares profit @ 6% or higher of the turnover received through account payee cheque/ draft/ electronic clearing system through bank account.
Under section 80JJA, deduction equal to 30%, of additional employee cost incurred in the previous year by an assessee in the course of a business, covered u/s 44AB, for 3 years including the year in which additional employment is made. But sub clause (b) of clause (i) specifies that if emoluments are paid through any other mode other than account payee cheque/draft/electronic clearing system through bank account then additional employee cost in case of existing business shall be NIL.
As per section 269SS, a person is prohibited to take/ accept any loan/ deposit from a depositor, any specified sum equal to Rs. 20,000/- or more other than through account payee cheque/ draft/ electronic clearing system through bank account.
As per section 269ST, a person is prohibited to receive from a person in a single day/ transaction/ one event/ occasion, an amount of Rs. 2,00,000/- or more other than through account payee cheque/ draft/ electronic clearing system through bank account.
As per section 269T, a banking company/ co-operative bank/ any other company/ co-operative society/ firm/ other person is prohibited from repaying any loan/ deposit made by it/ advance received by it amounting Rs. 20,000/- or more other than through account payee cheque/ draft/ electronic clearing system through bank account.
Now it is proposed to amend the above sections, in addition to the already existing modes of payment to include such other electronic mode as may be prescribed by the board.
5. Mandating acceptance of payments through prescribed electronic modes
The new proposed section 269SU provides that every person, carrying on business, shall provide facility for accepting payment through the prescribed electronic modes, in addition to the facility for other electronic modes of payment, if any, being provided by such person, if his total sales/ turnover/ gross receipt in the business exceeds Rs. 50 crores during the immediately preceding previous year.
Another new section 271DB is proposed to ensure compliance of section 269SU, which provides that a penalty of Rs. 5,000/- for every day during which such failure continues. If a person proves that there was sufficient & good reason for such failure penalty shall not be imposed. It is further proposed that penalty shall be imposed by JCIT.
The new proposed Section 10A of Payment and Settlement Systems Act, 2007 provides that no bank or system provider shall impose any charge upon anyone, either directly or indirectly, for using the modes of electronic payment prescribed u/s 269SU of the Income Tax Act.
6. Incentives for start-ups
To facilitate ease of doing business in the case of an eligible start-up, it is proposed to amend section 79 so as to provide that loss incurred in any year prior to the previous year, in the case of closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions stipulated currently at clause (a) or clause (b). For other closely held companies, there would be no change, and loss incurred in any year prior to the previous year shall be carried forward and set off only on satisfaction of condition currently provided at clause (a).
The existing provisions of the section 54GB of the Income-tax Act, inter alia, provide for roll over benefit in respect of capital gain arising from the transfer of a long-term capital asset, being a residential property owned by the eligible assessee. To be able to get benefit of this provision, the assessee is required to utilise the net consideration for subscription in the equity shares of an eligible company before the due date of filing of the return of income.
The assessee is required to have more than fifty per cent share capital or more than fifty per cent voting rights after the subscription in shares in the eligible company. The said section puts restriction on transfer of assets acquired by the company for five years from the date of acquisition. Currently the benefit of this section was only available for investment in the equity shares of eligible start-ups and that period also got over on 31st March 2019. Thus, at present no benefit is available for residential property transferred after 31st March 2019.
In order to incentivise investment in eligible start-ups, it is proposed to amend the said section so as to-
(i) extend the sun set date of transfer of residential property for investment in eligible start-ups from 31st March 2019 to 31st March 2021;
(ii) relax the condition of minimum shareholding of fifty per cent of share capital or voting rights to twenty-five per cent.
(iii) relax the condition restricting transfer of new asset being computer or computer software from the current five years to three years.
7. Incentives for Category II Alternative Investment Fund (AIF)
The existing provisions of the said section 56 of the Income-tax Act, inter alia, provide that where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be charged to tax. However, exemption from this provision has been provided for the consideration for issue of shares received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Currently the benefit of exemption is available to Category I AIF. With a view to facilitate venture capital undertakings to receive funds from Category II AIF, it is proposed to amend the said section to extend this exemption to fund received by venture capital undertakings from Category II AIF as well.
8. Incentives to Non-Banking Finance Companies (NBFCs)
As an exception to accrual system, interest income of certain specified assessees such as public financial institutions or a scheduled bank/ cooperative bank/ state financial corporations in relation to certain categories of bad or doubtful debts is chargeable to tax in the previous year in which it is credited to its profit and loss account or actually received, whichever is earlier in accordance to Section 43D. To provide a level playing field, deposit-taking NBFCs and systemically important non deposit-taking NBFCs are proposed to be added in specified assessees to claim the benefit of the section 43D.
Section 43B is also amended to provide that any sum payable by an assessee as interest on any loan from a deposit-taking NBFCs and systemically important non deposit-taking NBFCs shall be allowed as a deduction only if it is actually paid on or before the due date of furnishing the return.
9. Exemption of interest income of a non-resident arising from borrowings by way of issue of Rupee Denominated Bonds referred to under section 194LC
To incentivise low cost foreign borrowings through Off-shore Rupee Denominated Bond, a press release announced that interest payable by an Indian company or a business trust to a non-resident, including a foreign company, in respect of rupee denominated bond issued outside India during the period from September 17, 2018 to March 31, 2019 shall be exempt from tax. The exemption announced through the said press release is proposed to be incorporated in the law by inserting subsection 4C in section 10 of the Act.