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Pranay Bhatia, International Liaison Partner
Partner - Tax & Regulatory Services

14 February 2016

Issues Taken Up

The recommendations that have enthused corporate India the most relate to clarity on treatment of proceeds from share sales by companies, disallowance of certain expenses and deferment of new accounting standards for calculating taxes.

"They have made a recommendation for more clarity on whether profits from share sales are capital gains or business income. The effort to bring clarity on the issue is welcome," says Pranav Sayta, Tax Partner, Ernst & Young (EY).

The panel has suggested that proceeds from sale of shares that are capital assets must be treated as capital gains in all conditions except when the gains exceed `5 lakh and the shares have been held for 12 months or less.

"The courts have laid down various tests to distinguish shares held as investment from shares held as stock-in-trade. Disputes, however, continue. Very often taxpayers face difficulty in proving their intentions," it observed.

The panel has also suggested amendment in the provision related to disallowance of expenditure incurred to earn exempt income. It says 15 per cent tax litigation relates to determination of expenditure related to exempt income and so there is a need to clarify and simplify some provisions of this rule. It has recommended amendments to Section 14A to ensure that dividend (after dividend distribution tax) and share income (capital gains) are not treated as exempt income so that expenditure related to them is not disallowed as deduction.

"Section 14A says expenditure incurred in relation to earning exempt income should not be allowed. But tax officers think that investment in shares is done for earning exempt income, which is not always true. Neither does a stock investment always yield dividend," says Pranay Bhatia, Partner, Direct Tax, BDO India. "The proposal will reduce the enormous litigation that has been happening on Section 14A and benefit corporates which invest in shares of other companies - both within the group and outside," says Rajesh Gandhi, Partner, Deloitte Haskins & Sells LLP.

Many experts BT spoke to say that the deferment of Income Computation and Disclosure Standards (ICDS) is also a positive given the changes companies are already grappling with owing to the new Companies Act and accounting standards, besides the probable implementation of the goods and services tax. The panel has also given this reason for the deferment. ICDS is for calculating corporate taxes.

Sayta of EY says the deferment is good news as "ICDS only seeks to prepone income to expedite tax collection and does not try to identify income that is not on books of companies as per the generally accepted accounting standards". He is against separate accounting standards for taxation in the first place.

However, the recommendation that should enthuse companies the most is that refunds should not be held up merely because a tax return has been selected for scrutiny. "This will be a huge relief, especially for the business community, whose legitimate refunds can get stuck for years as their return has been selected for scrutiny," says Gandhi of Deloitte.

The panel has also recommended higher interest rates of 12 per cent and 18 per cent if the refund is paid after six months and 12 months, respectively, from filing of the return.

The committee has also tried to address a long-pending demand of non-residents to allow them the benefit of lower tax deduction in the absence of permanent account number (PAN). It has observed that "this provision (deduction at a higher rate in absence of PAN) has proved to be an impediment to the ease of doing business as many non-residents prefer to not do business with Indian residents if obtaining of PAN is insisted."

Therefore, it has recommended that a non-resident can furnish to the deductor his tax identification number (instead of PAN) in the country of residence, and in case there is no such number, a unique number on the basis of which the person is identified by the government can be issued.

Other suggestions include increasing the threshold for tax deducted at source (TDS), reduction of the TDS rate and no tax on buyer of property if the price is lower than the stamp duty value.

Issues Pending

One of the issues overlooked for now is characterisation of payment for software. The issue is related to whether it is royalty or not, especially when the software payment could be protected under the double tax avoidance treaty.

Another is taxability of offshore supplies and services in turnkey contracts. In such cases, foreign companies partner with Indian companies for projects, and generally the former brings in the technology. But due to different clauses of the agreements, tax authorities at times take a view that the arrangement is a partnership or a joint venture and, therefore, some payments for offshore services like designing, technology, etc, get taxed. Then there are issues like clarity on advertising and marketing promotion expenses under transfer pricing, and provisions related to domestic transfer pricing.

However, experts say that as the panel has a one-year term, which ends in November, it may take up many of these issues later.