IMPACT OF DEMONETISATION OF Rs 500 AND 1,000 CURRENCY

thSurgical strike on black money– Masterstroke by Modi Government:

The era of black colour is finally fading and white colour is resurfacing as the new shine everywhere. This well planned and multi-thronged agenda of the Modi government has now neared its final leg with demonetization of the high denomination currency. Both ends of black money – generation and consumption are controlled with this revolutionary step. Discouraging consumption will automatically discourage generation of black money.

Entire business scenario will undergo significant changes in coming days with some business wiping off completely. GDP and tax collection will increase significantly. Due to increased tax collection, the taxation rates are likely to go down for the common man. Unwarranted expenses which that were so far done out of black money would be minimized and a fair living in the society will emerge. Need based wealth will be created like real estate, gold, jewellery etc. Criminalization of politics will end and positive performance based politics will emerge in the society.

Having a bank account will now be the need of the hour and more money will flow into the banking system.  India’s global image will increase. Channelized crime will reduce as the funding will be difficult.

Though possibility of fresh generation of black money cannot be completely ruled out, but people dealing in black money have been left paralysed for now. More money is likely to flow in securities market. The overall impact on the  economy, politics, society and business is highly positive and is highly appreciated. I have discussed certain issues on black money in my earlier article “An era without Black Money”. I now discuss the impact of the event on the common man as under.

I have hereby analyzed impact of demonetization on several categories of assesses as under:

Case 1: Salaried employees: 

Salaried employees (salary by cheque): The persons who received salary by cheque must have withdrawn certain amount of cash from their account to meet their regular needs. Since the event happened suddenly on 8th of the month, hence cash must have remained in hand. In such instances, all you need to do is go and deposit the cash in the bank account preferably from the account from which the cash was withdrawn. The quantum should be less than the amount withdrawn. It is self-explanatory and should not invite any problem.

  1. Salaried employees (salary by cash): The persons who received salary by cash and the amount is less than Rs 20,833 per month or say Rs 2,50,000/- in a year can deposit all amount to the extent it does not exceed rs 20833/. In case you saved your entire salary upto November which comes around Rs 166664/, it may be deposited in your bank account on the premise that you have other earning members in the family to serve the house hold expenses. Normally for small amount less than Rs 20833 per month no question is likely to be raised.
  2. No PAN card: In case you don’t have PAN and you want to deposit cash more than Rs 50,000/, the bank will ask for your PAN number. PAN can be issued with the help of your tax consultant. It can also be done online on your own.

Case 2: Businessmen

  1. Businessman with a bank account: If you are a businessman and regular assesse maintaining books of accounts, then cash in hand as per books of account may be deposited in your bank account. Normal cash as per the size of business should not be a problem. But for instance, your business turnover in a year is less than Rs 1 crore say Rs 99 lacs, then your average daily sales should be Rs 33,000/. Thus, if you have already deposited a sum of Rs 30,000/- on 7th November, then you should be careful to deposit not more than Rs 33,000/- after 8th  However, if you plan to deposit more than the said amount, you should keep into mind cash balance as per your books of accounts or deposit cash more than normal only after taking your CA’s consultation.
  2. Businessman-presumptive taxation: In case you are into presumptive taxation of 8%, then also you will have to keep above suggestion in mind.
  3. Sales done on 8th November: In case of sales done by you on 8th November until 12 midnight, you should keep record of all bills, preferably with name and phone number and PAN number of customer. Further, maintenance of proper books of account is required in spite of presumptive taxation.  You should also check your stock in hand and then only deposit the cash in your bank account. In all cases, consultation with your CA in case of abnormal cash receipts is advisable.
  4. Accepting debtor’s receipts: In case you have debtors who suddenly emerged to pay their long pending dues, then you may accept the same freely if it is less than Rs 20000/. If it is more than that, you may accept the same because he may have problem of section 40A(3) of the Income Tax Act. However, there is no problem for you as this is an opportunity to realize your bad debts.

Case 3: Housewives:

  1. Limit of deposit: The housewives are the innocent lot who got entrapped in this sudden spate of events by default. They usually save money out of monthly amount received from the earning members of their family for any emergency and for serving future needs. They can deposit money uptil Rs 2,50,000/ and be scot-free provided they do not have any other matter related to income tax by their family members like filing of return etc.
  2. Housewives with no bank account: In case they don’t have any bank account, then it will be panic situation for them as they would have to stand in serpentine queues and get Rs 4000/- per day exchanged. It is advisable for them to open their bank account taking their family members into confidence and deposit the cash to feel safe and secured. In case they are not able to open their account, because of their family problems then they  have the option of depositing the money in the bank account of their trusted family members provided the limit of cash deposit upto Rs 250000/- in aggregate is not breached. This money can then be withdrawn later. I would like to suggest here that the government should open special assistance for such helpless housewives.
  3. Working females with small income: Normally in urban areas most females are engaged in running boutiques, beauty salons, stitching, tuitions, etc owing to which they must have cash held with them. If they have their bank account, then they should deposit the same in the bank upto limit of Rs 250000/-. Beyond that if they hold money, then they should get their PAN card made and deposit the money in their bank account. Taking advice from CA is advisable in such cases as filing income tax return for the FY 15-16, explaining source of income and getting assessed is required. If proper explanations are available to the satisfaction of officer, then there is no problem. But in any case, they must be tax compliant in future.It is advisable for the housewives that in case they do not get support from their family members, then they can make a group of trusted three-four friends who can go to any bank branch and deposit their hard money. I think bank officers also have soft corner for such groups and will cooperate.

Case 4: Farmers:

A normal farmer usually does not have a lot of cash. In fact, he is even indebted to the bank to some extent either with kisan credit card or some other loan. In case if he so desires, he may go to the bank and may deposit the said cash into his bank account and may get fresh loan.

  1. Farmer without bank account: If he does not have a bank account, then he can do so under the famed Jan Dhan scheme of the government and deposit the cash into that account and then gradually withdraw from the same and do the needful. Alternatively, he can get the cash exchanged from the counter @ Rs 4000/- per day.
  2. Farmer with bank account: A farmer is supposed to generate upto Rs 25000/- per hectare out of his normal crop and up to Rs 1,00,000 per hectare out of special crop. He may deposit the cash proportionately in his bank account accordingly. However, beyond that it may be questionable and he may have to answer and substantiate the source thereof. In abnormal cases, he may go to his CA and take proper advice and do accordingly.
  3. Sale of Land: A farmer may have abnormal cash due to sale of his land. He may deposit the cash equal to the registry value in the bank account and if his sold land is out of the aerial distance of the municipal limits as per the Income Tax Act than he need not worry. But if it is not so and his transaction of sale is after 1-6-2016, then he may deposit the same in his bank account, file income tax return, take advice of a CA and bring the unaccounted money into the account.

Case 5: Loans given through cash/entry:

1- Loan in cash: The person who has given cash loan of say Rs 2,00,000/- on interest to a businessman (popularly called kacche ka paisa on chitthi) may have several possible arguments.  I have analyzed the same from the viewpoint of giver and taker as under:

  • Giver – I have given valued cash earlier and hence, I want valued cash in return. You might have purchased gold, property or any other asset out of the valued money to increase your wealth and now you want to give old currency back which is not more than a piece of the paper. It’s not fair.
  • Taker – I am returning the cash which I have taken, why should I pay you new currency? It is your black money . Now you deposit the same in your bank account and face tax burden. I have taken it but used in my regular business and to repay the old loans. The old currency once deposited in bank account will come under income tax scanner and costing of the same will not be less than 50 % why I should suffer the same.
  • Giver- You deposit the same in your bank account. You used the same for your business and earned further black money. You suffer the tax burden, why should I suffer?
  • Taker – Why I should suffer the tax? I don’t have any taxable file. If I had been a tax payer, I would have obtained loan from bank, not from you. In any case, new currency will have its own premium and cost. If at all you want new currency in return, then you must wait at least for three years and that too without interest. Gradually out of my withdrawals, I may arrange the same and return the same to you. If agreed, then I may consider.

Such arguments may trigger but the crux is that if there is cash, it has to be converted and someone will have to suffer taxation which along with the penalty may trigger in the range of 30 % to 90 % in case where the amount is more than 250000/- So, the question comes that how this transaction will be settled. In future, generation of black money of this magnitude will also be difficult so as to return the money therefore the giver will be in a compromising position.

2-Loan given through entry:

  • A lot of loan entries are outstanding in the books of businessmen. Returning such entries and asking new currency will be very difficult. For big amounts, it is almost impossible. The only workable solution is to offer the same for taxation and face income tax. The person who has given the entry should write off the same as irrecoverable and forget about it.
  • In certain circumstances, the entry provider may ask the entry back in books because it is his assessed money that got value. He may provide new currency to the entry taker and square up the transaction. If the entry provider can arrange new currency even at a discount of 10-15%, then he should square up the transaction because in any case his money is white money which he generated after the tax effect of 30%.
  • The entry taker should also take new currency and gradually offer the same for taxation and to stay in peace.
  • Both the parties may negotiate and may agree to sacrifice upto 50-50 and settle the transaction.

Case 6: Sales by shopkeepers on 8th November, 2016:

  1. Sale on 8th November – different customers: Let’s say there is an electronic goods shop where sale of goods took place after 8 pm of 8th Customers want to purchase television worth Rs 40,000/- with old currency notes. There are 10 televisions and all are subject to sale to different customers. The shop keeper may sell the television issuing bill of 8th November in cash and deposit the same in his regular bank account.
  2. Sale on 8th November – single customer: In the above case, if a single person wants to buy all 10 televisions, then the shopkeeper may do so provided the person quotes his pan number and the shopkeeper complies with the provisions of rule 114B of the Income Tax Rules and maintains regular books of account. However, since he deposited more than Rs 2,50,000/- therefore it is most likely that he may face income tax department enquiry.
  3. Fabricated sales: In case there is no actual buyer, shopkeeper may show that all his televisions are sold and deposit his own black money in the bank account. In this case, if there is any instant enquiry from department than his stock will increase and he may have to face the consequences.
  4. Jewellers: Certain jewelers have sold huge amount of jewellery against cash and deposited the same in their bank. In such case,  subject to their stock, books of accounts and PAN, if it is more than Rs 200000/- per bill etc he has not violated the rules.  Although, he may have to face the department queries.

Other FAQ’s based on daily queries :

Question: I am an architect. I earned a sum of Rs 10 lac in cash in the current financial year of 2016-17 till 8th November 2016 besides my regular cheque income of Rs 20 lac.  I am a regular assesse and tax compliant upto 2015-16. What do I do?

Answer: You can cover the said cash income in your books of account if any for the current financial year 2016-17 and deposit the said amount of Rs 10 lac in your bank account. Automatically this income will also be a part of your regular income for the FY 2016-17. However, you may be tested for the source of such income by the income tax department and if you fail then you may face penalty of 200% on the tax amount of Rs 10 lac.

Question: In the above example if I have an accumulated cash balance of Rs 25 lacs out of the books which I earned in earlier years. Whether I can cover the same in my regular income for the current financial year.

Answer: In this case also, you will have to face tax and penalty consequence.

Question: I am a small businessman of kirana and provisions. My all business is in cash. I have cash balance of Rs 10 lacs. I earned this income over a period of last 10 years. I have not filed any tax return and do not have any PAN. What do I do?

Answer: If you have a bank account then deposit the same in your bank account and face the enquiry of income tax department. You may also file your income tax return for the FY 15-16 upto 31-3-2017. The department will give you an opportunity to substantiate your above Rs  10 lacs. With the help of CA, you may prepare your case history and business carrier graph. In case you are able to satisfy the officer then you may not be liable for any penalty.

In case you are supported in your family business by your wife and children then you may deposit some amount say upto Rs 250000/- in their account also. In any case, you should seek guidance from your CA. I think you earned the money and saved the same over a period of 10 years therefore the department may cooperate with you.

Question: We are businessmen dealing in semi whole sale cloth and selling goods on credit. There are debtors of Rs 20 lacs in the books. Suddenly some debtors want to pay cash of Rs 10-12 lacs in the old currency against their debt. But I am under presumptive taxation scheme and do not get audited my accounts as well as do not file any balance sheet. What do I do?

Answer: You may accept cash and deposit the same in the bank account. Maintain regular books of accounts in spite of presumptive taxation u/s 44AD. On enquiry, face the queries of the department under advice of a CA, produce all sales bills copy of ledger account of debtors, their identity etc and get assessed. I think if your genuineness is established, there should not be any problem.

Question : I am an NRI lady. I received cash gift on occasion of birthday, anniversary or on bidai from India from my parents. I kept that money with me in foreign country. The amount is Rs 135500/-. What do I do?

Answer : If you come to India before 30th December, deposit the same in your NRO account in India. If you are not visiting yourself, but you have any of your friend or relative who is visiting India before 30th December, then send money along with your authority letter in favour of Branch Manager and to get the money deposited in your bank account. Otherwise this INR will have no value now as no forex dealer will convert the same. Hence, you should take immediate action.

Question : I have Rs 10 lacs in cash. Some people are asking me to convert this cash at a discount of 40 %. What do I do?

You may do so if you like. But if your entire cash is to the tune of Rs 10 lacs,  then deposit the same in your bank account and show it as your current year income.  You shall get departmental notice. You will have to pay tax rate based on slab rate which may be around Rs 125000/- In case you are subject to penalty of 200% thereon then also the impact will be Rs 375000/- which is in less then RS 400000/- being the discount amount. And your money becomes accounted and white. Hence, it is advisable for you to follow the correct path.

Quantum of cash in the system – How much cash remains unaccounted?

According to sources there is nearly 17.5 lac crore cash currency in our country. Out of the same 85-86 % is in the form of 500/1000 currency notes. That amounts to nearly 14.87 lac crore worth money in this form in the system. According to me, atleast 2 lac crore is likely to remain unaccounted till 30th December. This would mean a great success of the entire exercise of the government in the direction to trigger blackmoney free economy. Accordingly, it may raise the GDP of the entire nation. However, this may take time because many business will vanish, others will tumble but ultimately the business of honest man will stand to gain.

Benefits to the country:

  1. In the long-term, benefits of GDP growth will outweigh the short-term transitional impact.
  2. Tax collection will increase and accordingly more money will be available to the government for development expenses.
  3. Corruption will decrease and may gradually be looked at as a surprise by common man and the coming generation.
  4. Because of series of steps taken by the government, ultimately generation of new black money out of new currency will be very limited and it will very difficult to trigger any leak which involves big cash.
  5. Surge in digital payments will be seen even for small value transactions. E-wallet firms such as Paytm, Mobikwik, etc will gain exponentially from cash curbs.
  6. Banks will stand to gain in long term as they will attract higher deposit (savings) balances and transaction volumes, lower cash handling costs and strengthening of digital payments ecosystem.
  7. After RERA and other measures, real estate transactions may see real value and stamp duty guideline concept may be scrapped down completely.
  8. Politics will trigger on actual performance. Funding of political parties through black money will minimize and disbursement of cash benefits to weaker sections of society for influencing voter’s decision may also disappear.
  9. Funding of terrorist activities including Maoist movements, and Criminalization in politics will also fade gradually.
  10. Internationally, the country’s index of black money free economy will increase. Commodity price fluctuations will be controlled or minimized.
  11. The international image of the country in terms of FDI, collaboration, investments etc will increase.
  12. The parking areas of black money like property, gold, bullion, etc will be discouraged and consequently the related business will see sea change in their overall segment.

Why honest businessman should be happy?

An honest businessman who was always struggling with tax evaders engaged in undercutting of prices will now have a level playing field.  Since such tax evaders are in deep trouble now, it will be the first choice of a consumer to deal with honest businessmen.

Assessment of the scheme:

The agenda of the government has been crystal clear- to free the economy from the evil of black money. The road map was properly planned via multi- level strategy. Gradually, over a period of two years all the leakages were plugged which I discussed in my earlier article “ERA WITHOUT BLACK MONEY. Ultimately, after closure of all windows and doors of the black money, it was most likely that the floor will be wiped out by the government which is accomplished by demonetizing the high denomination notes.  This unprecedented move of such a large scale has carried out under closed wraps, taking all by surprise and awe, the confidentiality, no rumor of such an event, and the implementation of the whole exercise highlights the transparency and clear focus of the government. In the past, such type of activities have been often leaked from government department to provide benefits to the big and influential.

The implementation of scheme could have been tackled without giving any opportunity to people, media and opposition to create hype.  Since, lacs of people are involved in the whole exercise, this kind of chaos was likely and anticipated. On the ground, some mismatch in the execution of scheme like less availability of cash, non-working of ATMs at some places, long queues, filling of forms are practical difficulties which is observed.  However, these are all immaterial as within a week everything will get normalized and the overall exercise will be remembered in the history of the country.

Possibility of future generation of black money

In future, due to various measures already taken and due to GST model of indirect taxes, the generation of black money will be difficult and expensive
affair.

But generation of black money may be termed as grass on the ground. The grass grows and gets greener by default owing to favorable environment.  Similarly, black money may also generate in future due to compatible situation but the volume will be very low. However, over a period of 5-10 years down the line it may again pile up.

The most important areas of governance in future will be to identify points of generation, creating vigil mechanism, taking instant action, and creating stringent penal measures so as to discourage generation of black money in the society.  Educating citizens to do cashless transactions, provision of cashless transaction at both ends – receiver and giver will pave a way towards society to get rid from the evil of black money.

CA MAHENDRA BADJATYA

E-mail: info@camkb.com, jainok@hotmail.com

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IMPACT OF DEMONETISATION OF Rs 500 AND 1,000 CURRENCY

Insolvency and Bankruptcy Code, 2016: Highlights

banrupcylaw
The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha on December 21, 2015 and was referred to Joint committee on The Insolvency and Bankruptcy Code, 2015. The report was presented in Lok Sabha and laid down in Rajya sabha on April 28, 2016. The code has been  passed by Lok Sabha on May 05, 2016 and Rajya Sabha on May 11, 2016.

The preamble of the code reads as under:

To consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Fund, and for matters connected therewith or incidental thereto.

Some of the key highlights of the Code are as follows:  

  • Applicability: The Code proposes to cover Insolvency of individuals, unlimited liability partnerships, Limited Liability partnerships (LLPs) and companies.
  • Adjudicating Authority: The Insolvency Resolution Process (IRP) for individuals and unlimited liability partnerships varies from that of companies and LLPs. The Debt Recovery Tribunal (“DRT”) shall be the Adjudicating Authority with jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (“DRAT”). The National Company Law Tribunal (“NCLT”) shall be the Adjudicating Authority with jurisdiction over companies and limited liability entities. Appeals from the order of NCLT shall lie to the National Company Law Appellate Tribunal (“NCLAT”).
  • Repealment: The Code seeks to repeal the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.
  • Amendment of legislation: The Code  seeks to amend  the following 11 legislations.
    1- The Indian Partnership Act 1932
    2- The Central Excise Act 1944
    3- The Income Tax Act 1961
    4- The Customs Act. 1962
    5- Recovery of Debts Due to Banks and Financial Institutions Act, 1993
    6-The Finance Act 1994
    7- The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002
    8- Sick Industrial Companies (Special Provisions) Repeal Act, 2003
    9- The Payment and Settlement Systems Act 2007
    10-The Limited Liability Partnership Act 2008
    11-The Companies Act, 2013
  • Insolvency Regulator: The Code proposes to establish an Insolvency Regulator (The Insolvency and Bankruptcy Board of India) to exercise regulatory oversight over:
    –  Insolvency Professionals
    –  Insolvency Professional Agencies and
    –   Information Utilities

    Under Regulator’s oversight, these agencies will develop professional standards, codes of ethics and exercise a disciplinary role over errant members leading to the development of a competitive industry for insolvency professionals.

  • Information utilities: The Code proposes for information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals.
  • Time deadlines: The Code proposes a swift process and timeline of 180 days for dealing with applications for corporate insolvency resolution. This can be extended for 90 days by the Adjudicating Authority only in exceptional cases. During insolvency resolution period (of 180/270 days), the management of the debtor is placed in the hands of an interim resolution professional/resolution professional.
  • Insolvency Resolution Plan: Further, an insolvency resolution plan prepared by the resolution professional has to be approved by a majority of 75% of voting share of the financial creditors. Once the plan is approved, it would require sanction of the Adjudicating Authority. If an insolvency resolution plan is rejected, the Adjudicating Authority will make an order for the liquidation.
  • Fast track resolution: The Code proposes for a fast track insolvency resolution process for companies with smaller operations. The process will have to be completed within 90 days, which may be extended upto 45 more days if 75% of financial creditors agree. Extension shall not be given more than once.
Insolvency and Bankruptcy Code, 2016: Highlights

Changes in the Finance Bill 2016 as passed by the Lok Sabha

Changes in the Finance Bill 2016 as passed by the Lok Sabha

On May 5, 2016, the Lok Sabha passed the Finance Bill. The Bill which was presented originally in the Lok Sabha on February 29, 2016 has not been passed in its original shape. Various changes have been made in the Bill. New amendments have been proposed. Some earlier proposed amendments have been removed, so on and so forth. A snippet of all changes made in the Finance Bill, 2016 as passed by the Lok Sabha viz-a-viz the Finance Bill, 2016 presented originally in the Lok Sabha are presented hereunder.

  1. Unlisted shares held for 24 months or less would be treated as short-term capital asset

As per section 2(42A) of the Income-tax Act, any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer is treated as short-term capital asset.

The aforesaid period of 36 months is treated as 12 months in case of shares held in a company. However, an amendment was made by Finance Act (No. 2) Act, 2014 to provide that the said period of 12 months won’t be applicable in respect of shares not listed in recognized stock exchange. Hence, with effect from 01.04.2015, unlisted share is treated as short-term capital asset if it is held for not more than 36 months immediately preceding the date of its transfer.

The Finance Bill, 2016 as passed by the Lok Sabha inserted a new clause to provide that the period of 36 months would be substituted with period of 24 months in case of unlisted shares. In other words, unlisted shares of company would be treated as short-term capital asset if it is held for a period of 24 months or less immediately preceding the date of its transfer.

  1. When employer’s annual contribution is deemed as income received by employee

The Finance Bill, 2016 proposed an amendment to the Fourth Schedule of the Income-tax Act to provide that lower of the following shall be deemed as income of the employee:

(i)   Annual contribution made by employer in excess of 12% of salary to the recognized provident fund account of the employees; or
(ii)   Rs. 1,50,000

The Finance Bill, 2016 as passed by the Lok Sabha provides that any contribution by employer in excess of 12% of salary to the recognized provident fund account of the employees shall be deemed as income of employee. The ceiling limit of Rs. 1.50 lacs has been removed from the approved Finance Bill.

  1. TCS collection at the time of receipt only in specific cases

The Finance Bill, 2016 proposed that every seller of a motor vehicle shall collect TCS at the rate of 1% of value of motor car if such value exceeds ten lakh rupees. Such tax was proposed to be collected from the buyer under section 206C at the time of debiting the amount receivable or at the time of receipt, whichever happened earlier.

The Finance Bill, 2016 as passed by the Lok Sabha provides that tax shall be collected under Section 206C only at the time of receipt of consideration.

  1. Section 270A – Computation of tax on underreported income

Under the existing provisions, penalty on account of concealment of income or on furnishing of inaccurate particulars of income is levied under Section 271(1)(c). In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, new Section 270A has been proposed to be inserted. It provides for levy of penalty in cases of underreporting and misreporting of income.

It is proposed that rate of penalty shall be 50% of tax in case of under reporting of income and 200% of tax in case of misreporting of income. Following amendments to Section 270A have been approved by the Lok Sabha:

(i)   What constitutes under-reporting of income: The Finance Bill, 2016 proposed six instances where a person shall be deemed to have underreported his income. However, the Finance Bill, 2016 as passed by the Lok Sabha has included one more instance of underreporting of income. A person shall also be deemed to have underreported his income where the amount of total income reassessed as per Section 115JB or Section 115JC (MAT or AMT) provisions is greater than the deemed total income assessed or reassessed under provisions of the MAT or the AMT immediately before such reassessment.
(ii)   Tax payable on underreporting of income: The existing clause of the Finance Bill, 2016, proposed a flat tax rate of 30% in respect of underreported income in case of Individuals, HUF, AOP, BOI, Artificial Juridical person. The Finance Bill, 2016 as passed by the Lok Sabha provides that the tax payable in respect of the underreported income shall be as under:
(a)   Return not furnished: Where return of income has not been furnished and the income has been assessed for the first time, the tax shall be calculated on underreported income as increased by maximum amount not chargeable to tax.  
(b)   In case of loss: Where the total income assessed or re-assessed is a loss, the tax shall be calculated on underreported income as if it was the total income.  
(c)   In any other case: Tax on underreported income as increased by income assessed or re-assessed originally less tax on income assessed or re-assessed originally.  
  1. Under reporting of income shall be punishable as willful attempt to evade tax

The Finance Bill, 2016 proposed insertion of a new Section 270A to levy penalty in case of under reporting and misreporting of income by assessee. However, there was no corresponding provision to invoke prosecution in this case.

Section 276C provides for rigorous imprisonment of minimum 3 months to 7 years in case an assessee has made willful attempt to evade tax.

The Finance Bill, 2016 as passed by the Lok Sabha amends Section 276C to provide that under reporting of income as per section 270A shall be punishable with rigorous imprisonment under section 276C.

  1. Processing of returns before scrutiny assessment

The Finance Bill, 2016 proposed mandatory processing of returns under Section 143(1) even when the scrutiny assessment notice is issued to the assessee. This amendment was proposed so that the assessee need not to wait for the refunds, if any, due to him till the scrutiny assessment was completed.

The Finance Bill, 2016 had provided that return shall be processed before issuing assessment order under section 143(3). However, the finance bill as passed by the Lok Sabha provides that the processing of return is not necessary before the expiry of one year from the end of the financial year in which return is furnished, where a notice is issued for scrutiny assessment under Section 143(2).

  1. Benefit of 25 percent tax rates on certain domestic companies

The Finance Bill, 2016 proposed insertion of new section 115BA to provide benefit of concessional tax rate of 25% to certain domestic companies engaged in the business of manufacturing or production of any article or thing, provided such company has been set-up and registered on or after March 1, 2016.

The Finance Bill, 2016 as passed by the Lok Sabha provides that benefit of concessional tax rate shall also be available to the companies engaged in research in relation to or distribution of article or thing manufactured or produced by it.

The Finance Bill, 2016 also proposed that to avail of the concessional rate of tax, domestic company shall exercise the option in the prescribed manner on or before due date of furnishing the return of income under section 139(1) for the relevant previous year.

It is also provided that once the option to avail of benefit of concessional tax rate has been exercised by the company for any previous year, it cannot subsequently withdraw the same or for any other previous year.

  1. Cost of acquisition of asset declared under Income Declaration Scheme, 2016

The Finance Bill, 2016 proposed Income Declaration Scheme, 2016 to provide an opportunity to taxpayers to declare their undisclosed income and pay tax, surcharge and penalty in aggregate at 45% of such undisclosed income.

It is provided under the scheme that where the income chargeable to tax is declared in the form of investment in any asset, the fair market value of such asset as on the date of commencement of this scheme shall be deemed to be the undisclosed income.

The Finance Bill, 2016 as passed by the Lok Sabha provides that the cost of acquisition of such asset shall be deemed to be the fair market value taken into account for purposes of Income Declaration Scheme, 2016.

  1. LLPs can be ‘Eligible start-ups’

The Finance Bill, 2016 proposed a new section 80-IAC to provide 100 percent deduction for 3 consecutive assessment years to an ‘eligible Start-up’ engaged in an eligible business. Such deduction may, at the option of assessee, be claimed for any three consecutive AYs out of the five years beginning from the year in which eligible startup is incorporated. The ‘eligible start-up’ is proposed to be defined to mean a ‘company’ engaged in an eligible business.

The Finance Bill, 2016 as passed by the Lok Sabha extends the definition of ‘eligible start-up’ to include ‘limited liability partnership’ also. In other words, LLPs shall also be eligible to claim deductions under Section 80-IAC subject to fulfilment of other conditions.

  1. Levy of additional tax on dividend

The Finance Bill, 2016 had proposed an additional tax of 10% if amount of dividend received by a taxpayer exceeds Rs. 10 Lakhs.

The Finance Bill, 2016 as passed by the Lok Sabha clarified that dividend whether paid or declared or distributed by one or more domestic companies, the aggregate of dividend shall be considered for the limit of Rs.10 lakhs but Tax shall be payable only on the amount of dividend exceeding Rs 10 lakhs.

  1. Tax on income from patent developed and registered in India

The Finance Bill, 2016 proposed insertion of new section 115BBF to tax royalty income in respect of a patent developed and registered in India at the rate of 10%.

The Finance Bill, 2016 as passed by the Lok Sabha inserts two new sub-sections in Section 115BBF to provide as follows:

(a)   Assessee may exercise the option for taxation of income from patents in accordance with the provisions of section 115BBF, in prescribed manner on or before the due date of furnishing of return of income under section 139(1) of the relevant previous year.
(b)   If assessee opts for taxation of income from patents as per section 115BBF in any previous year and fails to offer tax on income from patents as per section 115BBF in any of the 5 succeeding assessment years then he shall not be eligible to claim benefit of said section for 5 assessment years subsequent to the assessment year in which such income has not been offered to tax as per section 115BBF.

The Finance Bill, 2016 also provided that for the purpose of section 115BBF, patent shall be developed and registered in India. The word ‘developed’ had been described in the Explanations to mean the expenditure incurred by the assessee for any invention in respect of which patent is granted under the Patents Act, 1970.

The Finance Bill, 2016 as passed by the Lok Sabha specifically provides that the meaning of “developed” shall mean at least 75 percent of the expenditure incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970.

  1. Transfer of shares through a recognized stock exchange located in IFSC

In order to mobilise growth of International Financial Services Centres (IFCS), the Finance Bill, 2016 proposed that no Securities Transaction Tax (‘STT’) and Commodities Transaction Tax (‘CTT’) shall be levied on transactions of securities carried out through recognized stock exchange located in IFSC where the consideration for such transaction is paid or payable in foreign currency.

Consequently, it was proposed to amend the section 10(38) of the Income-tax Act to provide that long-term capital gains arising from transfer of equity shares, equity oriented mutual fund or units of business trust shall be exempt from tax if the transaction is undertaken in foreign currency through a recognised stock exchange located in an IFSC, even if STT is not paid in respect of such transactions.

However, no such amendment was proposed to section 111A [short-term capital gain arising from transfer of listed securities].

Therefore, the Finance Bill, 2016 as passed by the Lok Sabha makes similar amendment to section 111A to provide that short-term capital gains arising from transfer of underlying securities shall be taxable at 15%, if the transaction is undertaken in foreign currency through a recognised stock exchange located in an IFSC, even if STT is not paid in respect of such transactions.

  1. Amortization of spectrum fee

The Finance Bill, 2016 proposed to insert a new section 35ABA to provide that the spectrum fee paid for auction of airwaves shall be allowed to be deducted over the useful life of the spectrum.

The Finance Bill, 2016 as passed by the Lok Sabha also provides for consequences if specified conditions are not fulfilled. If subsequently there is a failure to comply with any of the conditions, the deduction shall be treated as wrongly allowed and the Assessing Officer may re-compute the total income of the assessee for the respective previous years. It is also provided that the provisions of Section 154 shall apply for four years from the end of the year in which the default is made.

  1. Relief to specific Non-Residents from the tax deduction under section of 194LBB

The Finance Act, 2015 had inserted a special taxation regime in respect of Category I and II Alternative Investment Funds (investment fund) registered with the SEBI. Under this regime the income of the investment fund (not being in the nature of business income) is exempt in the hands of investment fund. However, income received by the investor from the investment fund (other than the income which is taxed at the level of investment fund) is taxable in their hands. Accordingly, Section 194LBB was inserted for deduction of tax in respect of payment made to such investors.

The existing provisions of section 194LBB provide that in respect of any income credited or paid by the investment fund to its investor (resident or non-resident), a tax deduction at source (TDS) shall be made by the investment fund at the rate of 10% of the income. This TDS regime had created certain difficulties that non-resident investors, whose income was not taxable as per the relevant DTAA, were not able to claim benefit of lower or nil rate of taxation. Even section 197 didn’t provide for any facility to the deductee to approach the Assessing Officer for seeking certificate for TDS at a lower or nil rate in respect of deductions made under section 194LBB.

The Finance Bill, 2016 proposes to amend the section 194LBB to provide that tax shall be deducted at the rate of 10% where payee is resident. Where the payee is non-resident or foreign company, tax shall be deducted at the rates in force.

The Finance Bill, 2016 as passed by the Lok Sabha inserts a proviso that where payee is a non-resident, no tax shall be deducted in respect of any income which is not chargeable to tax.

  1. Withdrawal of amendments relating to retirement funds
  2. Recognized Provident Fund

The Finance Bill, 2016 proposed to amend Fourth Schedule so as to provide that:

(a)   Contribution: Employer’s contributions to the recognized provident fund account of the employees shall not be chargeable to tax to the extent of 12% of employee’s salary or Rs.1,50,000, whichever is less.
(b)   Withdrawal of employee’s contribution: Any withdrawal from the accumulated balance in the provident fund account, which is attributable to employee’s contribution made on or after April 1, 2016, shall not be chargeable to tax up to 40 % of such accumulated balance.

The Finance Bill, 2016 as passed by the Lok Sabha withdraws such amendment to the Fourth Schedule and maintains the status-quo for the taxability of contribution to and withdrawal from the provident fund account.

  1. Withdrawal from superannuation fund account

The Finance Bill, 2016 proposed that any payment in lieu of or in commutation of an annuity purchased out of contributions made on or after April 1, 2016, where it exceeds 40% of annuity, shall be chargeable to tax.

The Finance Bill, 2016 as passed by the Lok Sabha withdraws such an amendment.

  1. Rate of MAT for unit located in IFSC

The Finance Bill, 2016 had proposed to reduce the MAT rate from existing 18.5% to 9% in case of unit located in International Financial Services Center (‘IFSC’)

In order to enjoy the lower MAT rate, following conditions were to be satisfied:

  The taxpayer is a unit established in IFSC
  The unit must be a new unit established on or after April 1, 2016
  It should derive its income solely in convertible foreign exchange

All units that fulfill the above conditions shall have to compute MAT at 9% of book profit instead of normal rate of 18.5%.

The Finance Bill, 2016 as passed by the Lok Sabha withdraws the condition of establishment of new IFSC unit after April 1, 2016. Consequently, the benefit of reduced rate of MAT shall also be given to those units which have been set up before April 1, 2016.

  1. Immunity from penalty and prosecution in certain cases

The Finance Bill, 2016 proposed to insert section 270AA to provide immunity to the assessee from penalties under section 270A and prosecution under section 276C if the assessee pays the tax and interest within the time prescribed by the notice, provided assessee does not file an appeal against the order.

The Finance Bill, 2016 as passed by the Lok Sabha also includes immunity from prosecution under Section 276CC in the new Section 270AA.

  1. Tax on Accreted Income of Trusts

The Finance Bill, 2016 proposed to insert a new Chapter XII-EB, containing Section 115TD, 115TE and 115TF, under the Act to provide that ‘accreted income’ of a trust or institution registered under section 12AA shall be chargeable to tax at the maximum marginal rates in following circumstances:

(a)   If the trust or institution gets converted into any form which is not eligible under section 12AA;
(b)   If the trust or institution gets merged into any entity which is not eligible under section 12AA;
(c)   If the trust or institution, in case of dissolution, fails to transfer its assets to exempt entities under section 12AA and section 10(23C) (iv), (v), (vi) & (via).

The difference between the fair market value of the assets and liabilities of the trust or institution would be treated as ‘accreted income’ and tax thereon shall be paid in addition to the income-tax chargeable in respect of the total income of such trust or institution.

The Finance Bill, 2016 as passed by the Lok Sabha makes certain changes in the proposed Section 115TD, as under:

  1. Assets which don’t form part of accreted income

A proviso is inserted in Section 115TD to provide that the value of the following assets shall not be taken into consideration while computing the ‘accreted income’:

(a)   Any asset acquired by a trust or institution out of its agricultural income.
(b)   Any asset acquired by the trust before getting registered under section 12AA provided that no exemption under section 11 or 12 is provided to trust or institution during that period.
  1. Time-limit to pay tax on accreted income

As per section 115TD, a trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA in a previous year on occurrence of following events:

(a)   when registration granted to it under Section 12AA has been cancelled; or
(b)   It has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it:
  has not applied for fresh registration under Section 12AA in the said previous year; or  
  has filed application for fresh registration under Section 12AA but the said application has been rejected.  

It was proposed under Finance Bill, 2016 that the tax on accreted income shall be payable within 14 days from date of receipt of order cancelling registration or date of order rejecting application for fresh registration.

The Finance Bill, 2016 as passed by the Lok Sabha has proposed new time-limit for payment of tax on accreted income. It has been prescribed that tax on accreted income shall be paid within 14 days from:

(a)   the date on which the period for filing appeal before ITAT against the order cancelling the registration (or order rejecting the application) expires, if no appeal has been filed by the trust or the institution; or
(b)   the date on which the order in any appeal, confirming the cancellation of the registration (or application), is received by the trust or institution.
  1. Validity of registration obtained under section 12A

The Finance Bill, 2016 as passed by the Lok Sabha has made a clarificatory amendment to provide that registration under section 12AA shall include any registration obtained under section 12A.

  1. Section 80-IBA – Profit linked deduction on housing projects

The Finance Bill, 2016 proposed insertion of a new Section 80-IBA which provides for deductions from profit arising from the business of developing and building housing projects. Such deduction is available subject to fulfillment of certain conditions where project is located within cities of Chennai, Delhi, Kolkata or Mumbai or within acceptable distance from municipal limits. The Finance Bill, 2016 as passed by the Lok Sabha provides that the distance from municipal limits shall be measured aerially. Further, it is mentioned clearly that the ‘built-up area’ of the residential unit shall be relevant to check if the size of the residential unit is within threshold limit of 30 sq. meter or 60 sq. meter, as the case may be.

  1. Limit on deduction in respect of expenditure on agricultural extension project

The Finance Bill, 2016 had proposed to limit the deduction allowed under section 35CCC from existing 150% to 100% w.e.f April 1, 2018 (Assessment year 2018-19).

The Finance Bill, 2016 as passed by the Lok Sabha defers the applicability of this provision from April 1, 2018 to April 1, 2021 (Assessment Year 2021-22).

Source: https://www.taxmann.com

Changes in the Finance Bill 2016 as passed by the Lok Sabha

The Insolvency and Bankruptcy Code at a glance

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Lok Sabha has passed the much awaited Insolvency and Bankruptcy Code 2016 on May 05, 2016. It covers individuals, companies, limited liability partnerships and partnership firms. The new code will speed up the resolution process for stressed assets in the country. It attempts to simplify the process of insolvency and bankruptcy proceedings. The highlights of bankruptcy code are enumerated hereunder:

1. Strict time deadlines : Authority to decide insolvency applications within 180 days further, an extension of additional 90 days can be allowed

2. Fast track insolvency process: Fast track process is available for corporates, debtors with low income and assets, specified class of creditors and any other category notified by Govt. Under fast track process, 90 days time-limit is provided to complete whole process and further an extension of 45 days is allowed.

3. Adjudicating Authority:

    – NCLT for Corporates

    – DRTs for individuals and partnerships firms

    – NCLAT to act as Appellate Authority

4. Insolvency Regulator: To exercise regulatory authority over insolvency professionals, insolvency professional agencies and informational utilities.

5. Stringent punishment to defaulter: The bill proposes upto five-year jail term to debtors for concealment of property and debars bankrupt individuals from holding any public office.

6. Initiation of Insolvency process

6.1 Who can initiate corporate insolvency process?

Financial Creditor: Financial creditor can file application before Adjudicating Authority for initiation of insolvency process against Corporate Debtor along with-

– Proof of default and Name of resolution professional to act as an interim resolution professional

Operational Creditor: Creditor can initiate corporate insolvency process by giving 10 day notice to corporate-debtor

Corporate Debtor: The Corporate Debtor himself can initiate corporate insolvency process by making a reference to adjudicating authority

6.2 Time-limit for admitting/rejection of plea: The Adjudicating Authority shall admit or reject application within 14 days of receipt

6.3 Declaration of moratorium: The Authority shall declare moratorium to avoid institution of suits, transferring of assets, foreclosure, etc.

6.4 Public announcement: It includes details of debtor, name of ‘interim resolution profession’ and last date of submission of claims.

6.5 ‘Interim resolution professional’: Adjudicating authority to appoint interim resolution profession within 14 days from insolvency commencement date

6.6 Committee of creditors: Interim resolution professional shall constitute committee of creditors after collating all claims against debtors and determining their financial position. All decisions to be taken by 75% voting share of financial creditors. Resolution profession shall conduct the meeting of committee. Meeting may be in person or through electronic means

6.7 Submission and Approval of resolution plan: Any applicant can submit a resolution plan to resolution professional, such professional can forward the resolution plan to authority after taking creditors’ approval.

6.8 Adjudicating Authority can order liquidation if:

   – Resolution plan is not presented in given time

   – Resolution plan is not as per rules

   – Committee of creditors demands liquidation

   – Debtor-company violates the terms of resolution plans

7. Appointment of Liquidator:

    – Resolution professionals shall act as liquidator

8. Workmen dues to get priority: Workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company ahead of secured creditors.

9. Creation of ‘insolvency information utilities’

   – to collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies

The Insolvency and Bankruptcy Code at a glance

How does Budget 2016 affect me ?

shutterstock_20150508082009343Union Budget 2016 comes as  a mixed bag for individual taxpayers. The Finance Minister aptly struck the right chord by not touching income tax slab rates  but increasing his tax kitty by playing other smarter tactics.  Whereas on one hand, he offered relief to individual taxpayers, on the other hand, he adopted a tough stand to tax the high networth individuals.

Let’s have a close look on how individuals are affected by the Union Budget 2016-17:

1) Rate of surcharge is being increased to 15% from 12%, if your total income exceeds
Rs. 1 crore.
2) Relief under Section 87A is proposed to be raised from Rs. 2,000 to Rs. 5,000 if total income of a resident individual does not exceed Rs. 5,00,000.  This means you save Rs 3,000 in taxes this year.
3) Dividend income is exempt under section 10(34). However, the Finance Bill proposes an additional tax at the rate of 10% on gross amount of dividend income received from domestic company,  if the amount of dividend exceeds Rs. 10 lakhs per annum.
4) Additional deduction up to Rs. 50,000 is proposed under section 80EE in respect of interest on housing loan to the first time individual buyers of a residential house property.  This is applicable if you are a first-time buyer of a home, and are taking a loan up to Rs 35 lakh, (value of house should not exceed Rs 50 lakh)
5) Maximum deduction under section 80GG for individuals paying house rent but not receiving HRA shall be increased from Rs 24,000 to Rs. 60,000 per annum.
6) Time-limit to acquire or construct house property to claim deduction of interest on housing loan under section 24(b) has been proposed to be increased from 3 years to 5 years.
7) A new Section 54EE is proposed to provide exemption up to Rs. 50 lakhs for long-term capital gains invested in units of funds set-up by Government to promote start-ups.
8) Filing of return is now mandatory, even if entire income is exempt from tax under Section 10(38). However, in such case total income should exceed maximum exemption limit without giving effect to the provisions of Section 10(38).
9) Currently, belated return can be filed at any time before the expiry of 1 year from the end of the relevant Assessment Year. Now, it is proposed that belated return cannot be filed after expiry of relevant Assessment Year.

 

How does Budget 2016 affect me ?

Railways Budget 2016

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The main theme of the Budget 2016-17 was to Reorganise, Restructure and Rejuvenate Indian Railways.  with the main objectives being improving customer service, regaining the lost modal share, and introducing a new way of working by relooking the processes and structures.

Following are highlights of the Railway Budget for 2016-17, presented by Railway Minister Suresh Prabhu in Parliament:

  • No hike in passenger fares.
  • Operating ratio in 2016-17 92% from 90% in 2015-16.
  • Capital Expenditure in 2016-17 at Rs 1.21 lakh crore.
  • LIC to invest Rs 1.5 lakh crore over next five years.
  • Source of non-fare revenues include station redevelopment through commercial exploitation of vacant land and space rights over station buildings, monetizing land along tracks, monetizing soft assets such as data, software and some of the free services such as PNR enquiry, e-commerce activities on IRCTC website
  • 2,500 km of broad guage line will be commissioned in 2016-17.
  • 400 stations will be upgraded through PPP route.
  • Action has been initiated on 139 budget announcements made last year.
  • Eliminate all unmanned level crossings by 2020.
  • Swacch Bharat: 17000 biotoilets and additional toilets in 475 stations before the close of this financial year.
  • Increased quota for senior citizens and women travellers this year.
  • Wifi at 100 stations this year and 400 stations next year.
  • Enhanced capacity of e-ticketing system from 2,000 tickets/min to 7,200/min. Supporting 1.2 lakh concurrent users now, as opposed to 40,000 earlier.
  • All major stations to be brought under CCTV surveillance in a phased manner.
  • Deen Dayal coaches for long distance trains for unreserved passengers. These coaches will include potable water and higher number of mobile charging points.
  • Antyodaya Express, a long-distance, fully unreserved, superfast train service, to be operated on dense routes.
  • Humsafar would be fully air-conditioned third AC service with an optional service for meals.
  • Tejas will showcase the future of train travel in India. Operating at speeds of 130 kmph and above, it will offer onboard entertainment, local cuisine, Wi-Fi, etc.
  • Overnight double-decker, Utkrisht Double-Decker Air-conditioned Yatri (UDAY) Express on the busiest routes.
  • IRCTC to manage catering service in phased manner. Local cuisine of choice will be made available to passengers.
  • Cleaning of toilets by requests through SMS.
  • Children’s menu, baby foods, baby boards to be made available for travelling mothers.
  • GPS-based digital display in coaches for showing upcoming stations.
  • Will open cancellation facility through 139 helpline number.
  • Introduce bar-coded tickets on pilot basis to tackle menace of ticketless travel
  • 1,600 km of electrification this year and 2,000 km proposed for the next year.
  • Broad Gauge Lumding-Silchar section in Assam, connecting Barak Valley with rest of country.
  • North-East India, especially Mizoram and Manipur, to be connected through broad gauge soon.
  • Special purpose vehicle for the Ahmedabad-Mumbai high speed corridor registered this month.
  • Financial closure and an early award of tenders for two elevated suburban corridors between Churchgate-Virar and CSTM-Panvel
  • Raising of all low level platforms in Mumbai suburban stations in 2016-17
Railways Budget 2016

Countdown to Budget 2016-17, My Letter to FM

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It’s that time of the year again, when the print media, business news channels and websites are loaded with opinions, advice and suggestions from various representatives of the industry, trade unions & farmers associations. All of them  have only one wish on their cards – somehow their opinion forms a part of the Finance Bill to be tabled by the revered Finance Minister on February 29th in the Parliament.

And despite the global economic slumpdown,  FM Arun Jaitley seems in a sweet spot with the Indian economy maintaining a comfortable growth rate.  He however has to meet the demands of all and sundry and with electoral agenda being on the cards for the Modi led government, populist measures rank at the top of the list.

As an Indian citizen  and with a established chartered accountancy practice to my kitty, suggestions to FM for the budget run in my blood at this time of the year that only get rest when I pen them down.

I hereby present a few points that I have categorized under suitable heads which I believe are necessary to keep the economy on track and be on the forefront of the global stage for achieving the astounding growth that the world is expecting from us:

A- INCREASING TAX BASE:

  • Re-introduction of wealth tax under Income-Tax Act: Though wealth tax is abolished  but similar to gift tax element via section 56 of Income Tax Act 1961, wealth tax is also necessary to check large disparities of wealth.  I suggest that subject to integration of wealth tax with income tax law; a single tax return form covering wealth tax element should be introduced. Wealth tax or income tax whichever is more should be payable. The person who has paid income tax should not be taxed for wealth tax provided wealth tax is not more than income tax. This will not discourage the wealth formation in the country and at the same time restrict the formation of files with nil income tax and huge wealth.
  • Levy of tax on systematic agricultural activity by the corporates and HNIs to the tune of at least 5% of their net agricultural income. Such agricultural activity should be given status of normal business.
  • Tax may be imposed on charitable institutions at a  flat rate of 10 % basis on their income after certain threshold.
  • Farmers who are having more than 25 acre land should be taxed at least @ 5% as they are now not in need of money. They are land owners.
  •  Reward points based rating for honest tax-payers: The  tax payers who have not  defaulted and have clean files since last five-ten years should be given star rating under the online tax system regime that should carry weight in their profiles. They should made to feel honoured by rewarding them with higher stars. This will increase the tendency of becoming tax savvy in the society.
  • Abolition of dividend distribution tax & imposition of tax in case of higher dividend:  DDT should be abolished or reduced to 10 %. Those who are receiving dividend of Rs 5 lac or more from a single company should be taxed at 20 % flat. The overall recovery under this system shall be more and affluent promoters shall also contribute something to nation which they otherwise do not pay.
  •  Individual tax payers should mandatorily make a statement of affairs or balance sheet as part of income tax return. This will facilitate online declaration of wealth by all taxpayers including govt employees. I have noted that most of government employees have not declared their wealth which is giving negative signals to  other honest employees

B- IMPROVING TAX GOVERNANCE,  REDUCING LITIGATIONS:

  • Legislation should be brought  to avoid retrospective tax burden on the tax payer but retrospective amendment to rationalize and minimize litigations should be continued. This will restore the faith of the taxpayers under Indian tax system in the country and across the globe.
  • Avoid last day extension of dates for various compliance: This hurts diligent tax payers who comply before last day with due respect. Taxpayers who deliberately delay often pass comments to us like  “Why to take tension this is India. Definitely date will be extended”.  This way the faith of people who are honest & compliant is shaken and people have started taken authorities for granted.
  • Improving penalty proceedings of the system: It is not justified that the same officer imposes the penalty who made the assessment. He mechanically imposes the penalty and generates lot of appeals and litigations. On a high pitch unspeaking assessment, tax is imposed, interest is imposed, penalty is imposed, the demand pressed and a genuine tax payer faces lot of harassment.
  • Fair governance committee should be created: The tax system and governance should be under observation by a fair governance committee who should assess on their own the likely outcome of legal interpretation of particular law and guide their officers to act accordingly. This will avoid lot of unnecessary litigation, unnecessary creation of demand and ease the tax system for entrepreneur and tax payers.
  • Improving TDS system and its governance: The demand raised by OLTAS is sometimes not speaking and there is no “sunwai” anywhere. Officer recovers TDS as if it is a tax. This is not tax by itself. It is only a mode of recovery of tax. If somebody is paying TDS someone should be there to claim it and adjust against his tax liability in his return.
  • Removal of section 2(22) (e) from the income tax act, 1961. It is illogical andagainst the prudent and meaningful tax system.
  • Rationalization of section 14A of the Act or the rule 8D. I suggest that investments upto the paid up capital and free reserves of the company should be exempted and the interest expenditure should be taken on net basis in rule 8D. If it is changed retrospectively than it will automatically withdraw 80% litigation.
  • Rationalization of  provisions of section 35AD of Income Tax Act, 1961 to encourage more capital investment in various sectors.
  • Removal of clubbing provisions u/s 64 of the Income Tax Act, 1961.

C: CHANGE IN THRESHOLDS:

  • Basic exemption limit should be set for 5 years on accelerated system basis. Limit should be raised @ 25000/- per annum for each category of tax payer for the succeeding 5 years and each budget should ratify the same unless otherwise decided. This will make the road map of mass tax payers clear.
  • Increase  in turnover limit for conversion of Private Ltd Company into LLP from Rs 60 lacs to at least Rs 5 crores.
  •  Increase in 80GG limit from Rs 2000/- per month to Rs 10000/-per month at least or alternatively fix the threshold according to categories of city.
  • Increase in threshold of minor to at least Rs 10000/- per children up to two children.
  • Threshold of TDS on bank FDR, professional fee, and brokerage should be increased to 25000/-, 100000/- and 25000/- respectively. This will give relief to mass small tax payers and also reduce the small entries from the TDS system and its load.
  • Avoiding MAT for small sized companies or reduction of rate to 10 % or alternatively apply AMT to small size of companies.
  • Increase  in threshold of small size companies under company law also for ease of doing business upto Rs 2 crore for paid up capital and upto Rs 20 crore for turnover.
  • Savings u/s 80C or otherwise should be encouraged according to the tax payers taxable income bracket preferably on percentage basis or slab basis. Higher the income higher savings should be encouraged in multiple saving routes

D- OTHERS:

  • Option may be given for umbrella tax system for family member ITR filing and assessment.
  • Umbrella tax system in case of holding, subsidiary companies and other associate companies: This option may be given to the group companies provided the loss element or tax free element is ignored by the tax payer. Under company law also there should be a system for declaration of group. This will facilitate banks, credit agencies, stakeholder, revenue, etc to assess the overall control and management to keep check on frauds, manipulation, tax evasion etc. This will facilitate the govt system to assess the overall position of the group at one place and the genuine entrepreneur welcome the same if they are asked to pay same tax as they pay individually.
  • Bring back managing agency type system under company law: In the net based world where a single office can manage entire gamut of companies it will help a lot. The enterprises will be able to invite more talent, good governance and can afford highly paid employees if a managing agency company governs the same. The old company law dropped the same somewhere in 1975 such system but the system was good. Only the governance of that system failed.
  •  Safe harbour rule: In the domestic transfer pricing, safe harbor type rule  should be introduced. If both the tax payers are in the same tax bracket, then applicability should not arise. Direct definition of person covered should be made. At present there is confusion that a direct and indirect associate is also covered in the clutches of SDT. The problem is also coming in case of large joint families having six seven brothers and are doing same business with the support of each other but at arm’s length and facing this regulation. It is suggested that since individuals are doing business keeping their own interest first, therefore the relation of brother and sister should be eliminated. The lineal ascendants and descendents should remain as is.

As I pen down my thoughts, I do realize Mr FM may be addressed by tons of other CAs, finance experts and other industry representatives.  Yet as a honest tax payer and consultant, I believe that not only mine, but such ideas of various individuals, groups or representatives will be considered and definitely make a difference to the system and to my nation.

I dream of living in a prosperous nation

 

 

 

 

Countdown to Budget 2016-17, My Letter to FM