Union Budget 2025-26 | Taxmann’s Key Expectations & Recommendations

Taxmann's Advisory and Research has provided key expectations for the Union Budget 2025–26, highlighting critical measures to address India's economic challenges and foster long-term growth. With the GDP growth rate declining by 1.3%, the rupee depreciating by 3.58%, and inflation climbing steadily, the upcoming budget holds the potential to reverse these trends.
Key recommendations include rationalizing tax rates, promoting business investments, enhancing personal income tax structures, and prioritizing fiscal discipline. By incorporating over 100 targeted reforms, this budget could pave the way for achieving India’s ambitious goal of a $30 trillion GDP by 2047, offering immediate relief and a sustainable economic roadmap.

Introduction

A. Expectations and Recommendations for the ‘Tax Rates’

1.  Reduce the Tax Burden
2. Section 87A Rebate from Special Income

B. Expectations and Recommendations for the ‘Business Income’

3. Determination of FMV for the Purpose of Section 28(iv)
4. No Audit of Books if Non-resident Opts for Presumption Scheme under Section 44BBC
5. Weighted Deductions for R&D Expenditure
6. Disallowance of Sum Payable to MSEs
7. Concessional Tax Regimes for Firm/LLPs
8. Conversion of Gold Held as Stock-in-trade into EGR Should Not be Taxable
9. Taxability of Dividend Income Under the Head Profits and Gains from Business or Profession
10. Exemption to Be Given on Transfer of Shares Held as Stock-in-Trade in the Scheme of Amalgamation
11. No Section 44AD Benefit for Speculative Business
12. Allow Payment of Advance Tax in a Single Instalment in Case Section 44AE Presumptive Scheme is Opted

C. Expectations and Recommendations for the ‘Capital Gains’

13. Section 49 to Be Amended to Align with the Revised Section 47(iii)
14. Reference of Section 50AA Should be Given in Sections 45(2A) and 55
15. Clarification is Required on the Classification of Income Arising from Excess-Premium ULIPs
16. Section 54B Exemption Should Be Allowed Even if the New Agricultural Land Is Purchased Before the Sale of Agricultural Land
17. Clarification on Prevention of Double Deduction Claimed on Interest on Borrowed Capital
18. Amount to Be Deposited Under Capital Gain Account Scheme Should Be Actual Sale Consideration and Not the Stamp Duty Value
19. Taxability of Capital Gains in Case of a JDA Entered into by Assessees Other Than an Individual or HUF
20. Capital Gain Provisions Should Not Contain the Reference of Any Particular Year in Respect of the Sovereign Gold Bonds Scheme

D. Expectations and Recommendations for the ‘Crypto Currencies’

21. Clarity Over ‘Situs of VDA’ to Determine Taxability in India
22. VDA May Include Crypto ETFs
23. Section 50AA and Section 115BBH Should Have the Provision to Authorise CBDT to Prescribe the Method of Computation of Fair Market Value

E. Expectations and Recommendations for ‘Charitable Trusts’

24. Consequential Amendment to Section 13(9)

F. Expectations and Recommendations for ‘TDS and TCS’

25. Section 194T Should Be Amended to Remove Practical Difficulties
26. Alignment Between Section 194-IA and Section 50C/Section 43CA
27. Section 194-IA Reference Should Be Included in Section 197
28. Appeal Against the Order of AO for a Refund of Tax Deducted Under Section 195
29. Define ‘Seller’ for TDS Under Section 194Q
30. Seller for the Purpose of TCS Under Section 206C(1F) Should Include Individual or HUF
31. Need for an Enabling Provision to Deduct Tax Under Section 194N as Cash Withdrawn is Not an Income
32. Consequential Amendment Needed in the Proviso to Section 206C(5) Due to Omission of Section 203AA
33. Enhance the Scope to Apply for a Lower Tax Collection Certificate
34. Deduction of Tax on Dividends Paid by Any Mode Other Than Cash

G. Expectations and Recommendations for ‘Business Trusts’

35. Long-term Capital Gain Referred to in Section 112A Should Be Taxed at 10% Instead of MMR in the Hands of Business Trust
36. Definition of SPV Under the Income-tax Act Should be the Same as Defined Under SEBI’s Regulations on REITs and InVITs
37. Clarification Required for Pass-through of Losses Incurred by Business Trust and Securitisation Trust
38. Income-tax Benefits to Business Trusts on the Issuance of Rupee Denominated Bonds

H. Expectations and Recommendations for ‘Deductions & Exemptions’

39. Condition to Pay Emoluments by Specified Modes under Section 80JJAA Should Be Applicable in Case of New Businesses Also
40. Audit Might Be Necessary for Claiming Exemption Under Section 80-IBA

I. Expectations and Recommendations for ‘Other Incomes’

41. No Tax on Interest on Compensation Received in Appeal
42. Relaxation from 1st Proviso to Section 68 in Case of Loans Taken from Banks

J. Expectations and Recommendations for ‘Penalties’

43. Reference of Section 271AA and 271G is Required in Section 253
44. Start-ups May be Penalised for Not Fulfilling Conditions Under Section 80-IAC

K. Expectations and Recommendations for ‘Prosecutions’

45. Proviso to Section 276B Granting Relief from TDS-related Prosecution Should have Retrospective Effect
46. Prosecution Under Section 276C(2) Should be Contingent Upon Assessment
47. Limit Section 276CC Prosecution to Proven Cases
48. Streamline Provisions Related to Prosecution for Making False Statements
49. Prosecution Under Section 277A Should Apply to Both Parties Involved
50. A Sunset Clause Should be Added to Section 278AB
51. Show Cause Notice Must be Issued to the Assessee Before Launching Prosecution Proceedings

L. Expectations and Recommendations for ‘Appeals & Assessments’

52. Stay Granted by ITAT Should Not Be Vacated Automatically After the Expiry of 365 Days
53. Enhance the Scope of Not Being an Assessee-in-default

M. Other Expectations and Recommendations

54. Non-residents Should Be Excluded From Mandatory ITR Filing Where They Incur on Foreign Travel
55. Section 90/90A Does Not Empower AO to Issue TRC to a Resident Person
56. Delay in Handing Over Seized Material Beyond 60 Days Should Not Invalidate Search
57. Time Limit Should Be Provided Within Which the Seized Documents Should Be Provided to the Assessee
58. Reference to Corresponding New Criminal Major Acts (BNS and BNSS)
59. Tax Recovery Mechanism on Sale of Securitised Assets
60. A Deduction Should Be Allowed for the ‘Maintenance Charges’ While Computing Income From Let-Out Property
61. The Definition of Government Employee Should Be Inserted
62. Extension of Sunset Dates Under Various Provisions
63. Meaning of the Term ‘Month’ and Computation Thereof

N. Recommendations & Expectations Under GST

64. Legislative Amendment in Law Relating to Input Tax Credit (ITC)
65. Yearly Comparison to Be Made of Credit Shown in Form GSTR-2B With Credit in Form GSTR-3B
66. Items Listed as Blocked Credits Should Be Revisited
67. ITC Should Not Be Reversed on the Transfer of Exempt Intermediate Products to Distinct Entities That Become Taxable Upon Final Sales
68. Yearly Reconciliation of ITC Should Be Introduced in Form GST-9/9C
69. Allow Payment of Tax Under Reverse Charge by Utilising the Balance Available in the Credit Ledger
70. A Thorough Verification of Facts and Returns Should Be Done Before Cancelling the Registration
71. Legislative Misalignment in Case of ECOs Required to Pay Tax on Supplies Listed Under Section 9(5) as if They Are the Suppliers of Notified Services
72. Clarification is Required on the Applicability of GST on Crypto/NFT Transactions
73. Revisit the GST Provisions Related to the Online Gaming Industry
74. Need Clarity on the Treatment of Post-Sales Discounts and Incentives
75. Introduce an Enabling Provision to Split Up a Composite Supply
76. Introduce a Single Central GST Account at the National Level for Companies Having Multi-State Operations
77. Allow Small-scale Ice Cream Manufacturers to Opt for a Composition Scheme
78. Include Petroleum Products, ATF, and Natural Gas Under GST
79. Rationalise GST Rates
80. Substitute Phrase ‘Plant or Machinery’ With ‘Plant and Machinery’ in Section 17(5)(d) of the CGST Act
81. Supply of Goods Warehoused in SEZ or FTWZ to Any Person Before Clearance for Exports or to DTA Should Be Included in Schedule III of CGST Act, 2017
82. Transaction of Vouchers to be Treated as Neither Supply of Goods Nor of Services
83. Amendment to Be Made in the Definition of Local Authority
84. Clarity is Sought on the Taxability of EV Charging Stations
85. Clarity is Required on the Place of Supply of Intermediary Services
86. Inter-state RCM Transactions Should Be Covered Under the ISD Mechanism
87. Formula to Calculate Refund in Cases the Export (Under CIF Contract) is Made Without Payment of Tax Needs Rationalisation
88. Need Clarification on Whether Interest is Computed on Gross or Net Tax Amount After Utilising ITC
89. Pre-deposit for Filing of Penalty Appeals in Respect of Section 129 of CGST Act Should be Reduced
90. Powers to Arrest Should Be Exercised After Due Approvals
91. Offences Should be Mentioned Explicitly
92. Malicious Intent Should Be the Basis for Levying Penalty
93. Criminal Proceedings for Self-rectified Defaults

O. Recommendations & Expectations Around Customs Laws

94. The Current AEO Scheme Should Be Improved
95. AEO Certification for Merged Entities With Tier 2 Status Should be Simplified
96. Process With Respect to Customs Exemptions Should Be Rationalised
97. BCD Exemption to Be Given to OEM for Vehicles for R&D, Which is Currently Limited to Testing Agencies
98. Clarity is Required on the Definition of Beneficial Owner Under Customs
99. Introduction of an Incentive Scheme for Services Exports
100. Validity of Advance Ruling under Customs
101. Proposal for a Comprehensive Tax Amnesty Scheme under Customs

Disclaimer

Introduction

As the Union Government prepares to present the Union Budget on February 1, 2025, questions arise about how key macroeconomic indicators have evolved since the previous budget on July 23, 2024.

Over this period, the GDP growth rate declined by 1.3%, the Indian rupee depreciated by 3.58% against the US dollar, overall inflation rose by 1.62%, and food inflation climbed by 2.97%. These figures reflect a lag in multiple areas and underscore the need for decisive policy measures.

India’s economy has demonstrated resilience and adaptability for over a decade, yet considerable scope remains to accelerate growth. To reach a 30 trillion-dollar GDP by 2047, the country requires a sustained annual growth rate of approximately 9.5% over the next two decades. Global research by institutions such as the IMF, World Bank, and OECD points to three interlinked policy tools that can help achieve this ambitious goal:

1. reducing the policy rate of interest
2. maintaining inflation within moderate and predictable limits, and
3. lowering tax rates for businesses and individuals.

Both interest and tax rates have historically shaped these macroeconomic outcomes. Attention now turns to two critical upcoming events: the budget on February 1 and the Reserve Bank of India’s monetary policy meeting in the first week of February.

The budget can address tax rates, while the RBI should reduce interest rates. Easing either or both could inject much-needed liquidity into the economy, stimulating consumption, encouraging capital investment, and helping restore the GDP growth trajectory lost over the previous quarter.

A key measure in the upcoming budget should be rationalising tax rates and introducing clearer, more predictable tax regulations. Within prudent fiscal constraints, lower corporate tax rates often encourage higher business investment in capacity building, research and development, and workforce expansion. Similarly, lowering personal income taxes, provided the tax base remains broad and loopholes are minimised, can put more disposable income in the hands of individuals and stimulate household spending, which accounts for more than half of India’s GDP. International examples from regions such as Dubai and Ireland highlight how well-designed tax reforms can attract multinational corporations, drive investment, and foster robust economic growth.

Another factor the Finance Minister should prioritise is distinguishing between good and bad fiscal deficits. Good deficits generally finance projects that expand a nation’s long-term productive capacity, contributing to sustainable economic growth. Bad deficits, by contrast, result from expenditures and subsidies that do not yield long-term benefits. Curbing these inefficient expenses would free up resources for productive investments, reinforcing the broader aims of tax reforms and fiscal discipline.

Against this backdrop, expectations for the Union Budget 2025 span various economic and legal considerations. This document lists 100+ recommendations focused on tax reforms and proposes amendments to existing tax laws to resolve inconsistencies, clarify regulations, and address taxpayer requirements. By incorporating these changes, the Union Budget 2025–26 could deliver both immediate relief and a long-term growth strategy, positioning India on a more robust and sustainable economic trajectory in the years ahead.

Here is a list of our recommendations and expectations for the Union Budget 2025-26.

A. Expectations and Recommendations for the ‘Tax Rates’

1. Reduce the Tax Burden

It is recommended that the government increase the maximum exemption limit and reduce the overall tax rate to provide immediate relief to taxpayers and stimulate broader economic growth. Allowing individuals and businesses to retain a higher portion of their income would raise disposable earnings, fueling consumer spending and demand for goods and services. A higher exemption limit and reduced tax rates would make the taxation system more progressive by effectively supporting low- and middle-income groups, who often experience the greatest financial strain.

It is recommended that the maximum exemption limit be increased to Rs. 5,00,000 for all taxpayers, with a maximum tax rate of 30% applied after Rs. 20 lakhs.

2. Section 87A Rebate from Special Income

A resident individual with a total income of up to Rs. 5,00,000 can claim a tax rebate of up to Rs. 12,500 under Section 87A. From the assessment year 2024-25, if a resident individual opts for the new tax regime under Section 115BAC and his total income is up to Rs. 7,00,000, he can claim a higher tax rebate of up to Rs. 25,000.

This increased rebate available to taxpayers opting for the new tax regime has led to controversy. The controversy revolves around the interpretation of Section 87A regarding its applicability to incomes subject to special tax rates (e.g., short-term capital gains tax under Section 111A or winnings from lotteries).

From the taxpayer’s perspective, the rebate under Section 87A should apply to the total income as defined in Section 2(45) without excluding the income taxable at the special rate as long as the total income is below the threshold of Rs. 7 lakhs. However, the revised ITR utility released by the Department on 05-07-2024 provides the rebate under Section 87A from the taxes computed on incomes subject to normal tax rates. Special rate incomes are excluded from the rebate calculation. This interpretation has caused inconsistency and confusion among taxpayers.

On this matter, the Bombay High Court[1] held that procedural changes, such as those in utility software or instructions issued by the tax department, cannot override the substantive right to the rebate. Any action or inaction on the part of the tax authorities that limit the ability of taxpayers to avail of this statutory benefit is arbitrary and violative of the rule of law. Taxpayers should not bear the consequences of administrative inefficiencies or unilateral executive actions that undermine the legislative intent behind section 87A. It is well-settled that statutory benefits must be extended in a manner that aligns with the objectives of the legislature. In this regard, procedural changes that deprive taxpayers of such benefits warrant judicial intervention to rectify the anomaly and ensure justice. Tax authorities must act as facilitators to help taxpayers comply with the law rather than creating impediments through technical or procedural hurdles. Ensuring fairness, equity, and transparency in tax administration is crucial for upholding public confidence in the system. The High Court provided the interim relief by directing the CBDT to extend the due date for e-filing of the income-tax returns in relation to the assessees who are required to file a return of income by 31-12-2024. Consequently, the CBDT[2] extended the due date for filing a belated or revised return by a resident individual for Assessment Year 2024-25 to 15th January 2025.

It is recommended that the legislature amend Section 87A in the upcoming budget to explicitly mention that the rebate should be allowed for both normal and special income. However, certain incomes, such as winnings from lotteries or online games, could be excluded from the computation of the rebate.

Read More Rebate Under Section 87A on Taxmann.com/Practice

B. Expectations and Recommendations for the ‘Business Income’

3. Determination of FMV for the Purpose of Section 28(iv)

Section 28 of the Act provides a list of all receipts or income that are chargeable to tax under the head of business income. Section 28(iv) provides that the value of any benefit or perquisite, whether convertible into money or not, arising from the business or the exercise of a profession, is chargeable to tax as business income.

The Finance Act, 2022 has inserted a new Section 194R in the Act for the deduction of tax from the benefit or perquisite arising from business or profession. The value liable for tax under section 194R is the value or aggregate value of any benefit or perquisite that is liable to be taxed in the hands of the resident payee under Section 28(iv) or any other provision as clarified by the CBDT[3].

Section 28(iv) or Section 194R does not prescribe any valuation method of benefit or perquisite, nor does it empower CBDT to prescribe any valuation rules. Thus, it becomes difficult to determine what amount shall be brought to tax under this provision. Though the CBDT[4] in Question 5 has specified that the purchase price or sale price, as the case may be, shall be the value of the benefit or perquisite, this guidance is insufficient to determine the value of every benefit or perquisite. Therefore, it is recommended that the necessary valuation mechanism be put in place to tax the income under Section 28(iv) and deduction of tax under Section 194R.

4. No Audit of Books if Non-resident Opts for Presumption Scheme under Section 44BBC

The Finance (No. 2) Act 2024 introduced a new presumptive tax regime of Section 44BBC for non-residents engaged in the operation of cruise ships. The scheme provides a clear, simple, and predictable tax structure for non-residents, making it easier for them to do business in India.

Section 44AB provides for mandatory audit of books of accounts of an assessee who is engaged in business or profession if gross turnover or receipts from business or profession exceeds the prescribed threshold limit.

The third proviso to Section 44AB provides an exemption from mandatory audit of books of accounts to the non-residents opting for presumptive taxation scheme who are either engaged in shipping business under Section 44B or operation of aircraft under Section 44BBA. However, no amendment has been made to extend this tax audit exemption to assessees covered under Section 44BBC.

It is recommended that consequential amendments be made to Section 44AB to provide relaxation to the non-residents from the mandatory audit of books of accounts under Section 44AB of the Act.

Read More Presumptive Scheme for Cruise Shipping Business on Taxmann.com/Practice

5. Weighted Deductions for R&D Expenditure

According to an estimate by the Department of Science & Technology, Ministry of Science & Technology[5], India’s Gross Expenditure on R&D (GERD) as a percentage of GDP was 0.66% and 0.64% during the years 2019–20 and 2020–21, respectively. These statistics stand at more than 2% of the Gross Domestic Product (GDP) in the developed nations.

GERD in India is mainly driven by the Government sector, comprising the Central Government (43.7%), State Governments (6.7%), Higher Education (8.8%), and Public Sector Industry (4.4%), with the Private Sector contributing 36.4% during 2020–21. In most developed and emerging economies, the participation of Business Enterprises in GERD is generally more than 50%. In fact, it is more than 70% for China, Japan, South Korea, and the USA.

During the year 2020–21, Industrial R&D expenditures were spent on drugs and pharmaceuticals, with a share of 33.6%, followed by Textiles (13.8%), Information Technology (9.9%), Transportation (7.7%), Defence Industries (7.3%), and Biotechnology (4%), respectively.

Regarding Patents filed in 2021-22, India is in 6th position with 66,440 patents amongst the world’s top 10 Patent Filing Offices and 7^th in terms of Resident Patent Filing activity. It is more saddening that 57% of patents have been granted to non-resident filers.

There is wide consensus on the role of R&D as a driver of innovation, economic performance, and social well-being. To address failures in R&D, governments worldwide strive to boost R&D investment using tax incentives. In 2020, R&D tax incentives accounted for around 55% of total government support for business R&D in the OECD area, up from 30% in 2000.

To become a global power, India needs to boost the private sector’s R&D expenditures more. This can be achieved by incentivising the companies that are spending on R&D. These can be achieved through Income-based tax incentives (IBTI) or Expenditure-based tax incentives (EBTI). While EBTI provide tax relief based on R&D expenditures, IBTIs seek to reduce the taxation of the income from intangibles resulting from R&D and related activities. They do so by offering a preferential tax rate to the income arising from certain types of R&D intangibles. In 2022, 21 out of 38 OECD countries offer IBTIs. With the exception of Luxembourg, all of these countries offer IBTIs together with EBTI, such as R&D tax credits.

In contrast, India had withdrawn the weighted tax deduction under Section 35 from the assessment year 2021-22. Thus, it is recommended that the government reintroduce weighted deductions for resident persons investing in R&D to strengthen private-sector R&D investment.

6. Disallowance of Sum Payable to MSEs

Section 43B of the Income-tax Act provides a list of the expenses deductible upon payment, with certain exceptions. The Finance Act 2023 amended Section 43B, allowing deductions for payments to micro and small enterprises (MSEs) beyond the time limit set by the MSMED Act in the year the payment is actually made.

While the intention behind Section 43B(h) is commendable in protecting the interests of MSMEs, its implementation poses several practical challenges. The provision fails to consider the diversified credit period followed across various industries. It does not provide any relaxation in the limitation period where parties renegotiate the payment terms due to quality issues in the previous delivery.

Thus, it is suggested that the government consider amending Section 43B(h) or the MSMED Act in the upcoming budget to allow greater flexibility, which will help achieve its intended outcome.

7. Concessional Tax Regimes for Firm/LLPs

The Government has introduced concessional and alternative tax regimes for domestic companies, individuals, HUF and cooperative societies. However, partnership firms and LLPs are still taxable at a flat rate of 30%. It is recommended that Govt. introduce corresponding concessional tax regimes for the firms and LLPs.

8. Conversion of Gold Held as Stock-in-trade into EGR Should Not be Taxable

To promote the concept of Electronic Gold, the Finance Act 2023 excluded the conversion of the physical form of gold into EGR and vice versa by a SEBI-registered Vault Manager from the purview of ‘transfer’ for the purposes of Capital gains. However, the FA 2023 did not insert any provision to exempt the deemed income arising from converting gold held as stock-in-trade into EGR. This situation may arise if this conversion from gold to EGR or vice-versa is considered as an exchange of assets.

This omission creates a discrepancy in treatment between gold held as a capital asset and gold held as stock-in-trade, potentially discouraging market participants from actively participating in the Electronic Gold ecosystem.

To ensure consistency and equity in the treatment of gold held in different capacities, we recommend exempting the conversion of gold held as stock-in-trade into EGR from taxability as business income.

9. Taxability of Dividend Income Under the Head Profits and Gains from Business or Profession

With effect from Assessment Year 2021-22, the Finance Act, 2020 has abolished the dividend distribution tax (DDT) and moved to the classical system of taxation of dividend. Thus, a domestic company shall not be liable to pay DDT on the dividend declared, distributed or paid on or after 01-04-2020 and consequently, such dividend shall be taxable in the hands of shareholders. As dividend is now taxable in the hands of shareholders, the timeless controversy of its taxability under the relevant head of income would come to the fore again.

In the Income-tax Act, there are five heads of income – Salary, House Property, Business or Profession, Capital Gain and Other Sources. Income from other sources is a residuary head of income and sweeps in all taxable incomes which fall outside the other four heads of income. The provisions relating to the taxability of residuary income are contained in Section 56. The relevant provisions read as under:

“Income from other sources

56. (1)Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely:—

(i) dividends;

(ia)…………………………..;

(ib)…………………………..;

(ic)…………………………..;

(id) income by way of interest on securities, if the income is not chargeable to income-tax under the head “Profits and gains of business or profession”;

(ii) to (xiii)……………………………….”

Clauses (i) to (xiii) of Section 56(2) provide for the chargeability of various incomes under the head of other sources. Clause (i) explicitly specifies that dividend shall be taxed under the head of ‘income from other sources’. However, for several other items of income specified in Clauses (ia) to (xiii), the provision is qualified by the phrase ‘if such income is not chargeable to income-tax under the head’ Profits and gains of business or profession’. For instance, as per clause (id), interest on securities is chargeable to tax under the head of other sources only when it is not chargeable to income-tax under the head “Profits and gains of business or profession”. The exclusion of the said phrase from clause (i) suggests that the dividend income can never be taxed as a business income and must always be taxed under the head of ‘income from other sources’.

However, the taxability of dividend income under the head’ business or profession’ when it is connected to the business carried on by the assessee (for example, dividend received in respect of shares held as stock-in-trade) has always been a matter of turf war.

The Delhi High Court, in the case of CIT v. Excellent Commercial Enterprises & Investments Ltd. . [2005] 147 Taxman 558 (Delhi), held that where shares are held by the assessee as a stock-in-trade, then it could not be said that the dividend income would fall as an income from other sources as contemplated under section 56. The Supreme Court, in the case of Brooke Bond & Co. Ltd. v. CIT [1986] 28 Taxman 426 (SC), held that the nature of the dividend income must be determined having regard to the true nature and character of the income.

It is recommended that like other clauses, dividend income should be taxable under the head of ‘income from other sources’ if it is not chargeable to income-tax under the head ‘Profits and gains of business or profession’. Section 56(2)(i) should be read as under:

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—

(i) dividends [, if such income is not chargeable to income-tax under the head “Profits and gains of business or profession”];

Read More Taxation of Dividend on Taxmann.com/Practice

10. Exemption to Be Given on Transfer of Shares Held as Stock-in-Trade in the Scheme of Amalgamation

As per Section 47(vii), any transfer of a capital asset, such as shares held by a shareholder in the amalgamating company (transferor), under a scheme of amalgamation is not regarded as a transfer, provided the specified conditions are satisfied. Thus, no tax implication arises in the hands of the shareholder at the time of allotment of shares of the amalgamated company (transferee) in lieu of shares held as a capital asset in the amalgamating company (transferor).

The above exemption is available only when the shareholders hold the shares as capital assets. If such shares are held as stock-in-trade, no exemption is provided, and profits and gains arising from the transfer of shares will be chargeable to tax under the head ‘profits and gains from business and profession’.

This differential tax treatment, which is purely based on the nature of the investment made by the shareholders, is arbitrary. Thus, it is recommended that the government bring parity and amend Section 47(vii) to extend the exemption to shares held as stock-in-trade.

Read More Transfer of Capital Asset as a Result of Business Restructuring on Taxmann.com/Practice

11. No Section 44AD Benefit for Speculative Business

Section 44AD provides that an assessee, whether a resident individual, HUF, or partnership firm (excluding LLP) carrying on any business, is eligible to declare its income at the presumptive rate of 6% or 8%, as the case may be.

However, the following persons cannot opt for provisions of Section 44AD:

• Person carrying on the business of plying, hiring or leasing goods carriages referred to in Section 44AE;
• Persons carrying on professions as referred under Section 44AA(1);
• Persons earning income in the nature of commission or brokerage; or
• Person carrying on agency business.

The income-tax Act does not restrict the person carrying on speculative business to opt for the presumptive taxation scheme prescribed under Section 44AD. However, instructions appended to the ITR Form 4 provide that income from the speculative business is not required to be computed under Section 44AD. It is expected that instead of clarifying in the instructions to the ITR, it may be provided specifically in the provision itself to avoid any litigation on this point.

Read More Speculative Business and Presumptive Scheme for Businesses under Section 44AD on Taxmann.com/Practice

12. Allow Payment of Advance Tax in a Single Instalment in Case Section 44AE Presumptive Scheme is Opted

Section 211 of the Income-tax Act provides the due dates and the amount of advance tax payable in instalments. This provision requires a taxpayer to pay the advance tax in four instalments during the financial year on or before the specified due dates. However, this provision allows taxpayers who have opted for a presumptive taxation scheme under Section 44AD and Section 44ADA to pay 100% of the advance tax by 15 March of the financial year.

As there are more presumptive taxation schemes allowed under Sections 44AE, 44B, 44BB, etc., this option to pay advance tax in a single instalment is allowed only for those who have opted for Section 44AD and 44ADA presumptive scheme. Where the analogy behind such a provision was to extend this option to only resident taxpayers, then this option should be allowed to those resident taxpayers as well who have opted for Section 44AE presumptive scheme. Thus, it is recommended that the option to pay the entire advance tax in a single instalment should be extended to assessees who have opted for the Section 44AE presumptive scheme.

Read More Advance Tax and Presumptive Scheme for Transporters under Section 44AE on Taxmann.com/Practice

C. Expectations and Recommendations for the ‘Capital Gains’

13. Section 49 to Be Amended to Align with the Revised Section 47(iii)

Section 47 of the Income-tax Act explicitly excludes certain types of transfers from the definition of ‘transfer’ for the purpose of capital gains, including gifts or wills.

Section 49 pertains to the cost of the acquisition of a capital asset. Under Section 49(1), if an assessee acquires a capital asset through a gift or will, the acquisition cost is deemed to be the cost incurred by the previous owner.

The Finance (No. 2) Act 2024 amended Section 47(iii), making the transfer of capital assets by entities other than individuals or HUFs through a gift, will, or irrevocable trust taxable.

However, Section 49 continues to assign the previous owner’s cost of acquisition to all gifts and wills, irrespective of the transferor’s status. To maintain consistency with the amended Section 47(iii), Section 49 should be revised to apply only the previous owner’s cost to gifts or wills received from individuals or HUFs.

Read More Capital Gains on Transfer of Asset Acquired from Previous Owner on Taxmann.com/Practice

14. Reference of Section 50AA Should be Given in Sections 45(2A) and 55

The Finance Act 2023 inserted a special provision in Section 50AA for the computation of capital gains arising from the transfer or redemption or maturity of Market Linked-Debenture (“MLD”) or Specified Mutual Fund (“SMF”).

In a general situation, the cost of acquisition of a capital asset, being a security, is computed as per Section 55 read with Section 45(2A). Section 55 provides that, for the purpose of Section 48 and Section 49 of the Act, the cost of acquisition shall be computed in the prescribed manner. Section 45(2A) stipulates that in the case of securities held in dematerialised form, the FIFO method would apply for determining the “date of transfer” and “period of holding”. This method applies for the purpose of Section 48 and Section 2(42A). In simple words, the cost of acquisition and the date of transfer of a security is computed as per Section 45(2A) and Section 55, if the capital gain is computed as per Section 48. When a capital gain is computed in a special manner, as provided in Section 50AA, the mechanism provided in Section 45(2A) and Section 55 may not apply.

If it is assumed that the omission to give reference to Section 50AA in Section 45(2A) and Section 55 is unintentional, the cost of acquisition and the date of transfer shall be computed as per the mechanism discussed above. However, if a contrary view is taken that such omission is intentional, in the absence of any guidance in Section 50AA, the investor might take the position to use either the FIFO method or the weighted average method, whichever is more beneficial. In the FIFO method, the MLDs or SMFs acquired last will be taken to remain with the assessee, while MLDs or SMFs acquired first will be treated as sold. In the weighted average method, the cost of acquisition of the MLDs or SMFs sold is the weighted average price of all his holdings at the time of sale.

Thus, it is recommended that the upcoming Finance Act include a reference to Section 50AA in Section 45(2A) and Section 55.

15. Clarification is Required on the Classification of Income Arising from Excess-Premium ULIPs

Section 10(10D) provides for exemption with respect to any sum received under ULIP, including the sum allocated by way of bonus on such policy. However, if the premium is paid in excess of the limits prescribed, no exemption will be provided under this section except in case of the death of the policyholder.

Exemption under this section would not be allowed with respect to any sum received under the ULIPs, in case of following cases:

• If the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured, then no exemption under this section would be allowed with respect to the sum received under the policy. Such a situation is hereinafter referred to as ‘excess premium’.
• Besides restricting the exemption under Section 10(10D) for payment of excess premium, the Finance Act, 2021 has inserted Fourth and Fifth Proviso to Section 10(10D) that no exemption shall be available under this provision in respect of ULIPs issued on or after 01-02-2021, if the amount of premium payable for any of the previous year during the term of the policy exceeds Rs. 2,50,000 (‘high premium ULIPs’).

As per Section 2(14) of the Income-tax Act, only those ULIPs shall be considered as a capital asset to which exemption under Section 10(10D) does not apply, on account of the applicability of the fourth and fifth proviso thereof. In other words, only the high-premium policies will be covered within the meaning of capital asset. It is not clear whether excess-premium policies (where premium is more than 10% of the sum assured) shall be considered as a capital asset. This does not seem to be logical but seems to be an inadvertent error. If this aspect is ignored, the proceeds from the excess premium policies shall also be taxable under the head capital gains.

Since the Income-tax Act does not contain any guidance on the taxability of excess premium ULIPs, it can be argued that the income arising from excess premium ULIPs should also be taxable under the head capital gains. The reasoning behind this is that when a person takes an insurance policy, he gets the right to receive the sum due against his insurance policy either on maturity or on its surrender or mishappening. Therefore, the right to receive a sum from the insurance policy is a capital asset within the meaning of Section 2(14), and any income or losses arising on its transfer shall be chargeable to tax under the head capital gains.

It is recommended that the upcoming Finance Act bring necessary amendments to clarify this aspect.

16. Section 54B Exemption Should Be Allowed Even if the New Agricultural Land Is Purchased Before the Sale of Agricultural Land

Section 54B provides an exemption to an Individual or HUF from the capital gains arising from the transfer of agricultural land. The exemption is allowed if capital gains are invested in a new agricultural land within the prescribed time limit.

The provisions of Section 54B provide relief when the capital gain arising from the transfer of agricultural land is invested in another agricultural land within two years after the date of transfer. Sections 54 and 54F also allow capital gain exemption if the assessee purchases a residential house either within one year before the date of the transfer or within two years after the date of transfer of the original asset.

Unlike Section 54/54F, Section 54B does not allow the capital gain exemption if the assessee purchases agricultural land before the date of transfer of old agricultural land. It is recommended that the deduction under Section 54B should be allowed even if the assessee purchases the new agricultural land before selling the original agricultural land.

Read More Capital Gain Exemption under Section 54B on Taxmann.com/Practice

17. Clarification on Prevention of Double Deduction Claimed on Interest on Borrowed Capital

Section 48 of the Act provides for the deduction of the cost of acquisition and cost of improvement of the asset for the computation of income chargeable under the head “Capital Gains”.

The Finance Act 2023 inserted a proviso to Section 48(ii) with effect from 01-04-2024, which provides that the interest claimed under Section 24 or Chapter VIA shall not be considered part of the cost of acquisition or improvement of the capital asset.

It must be noted that while computing the income from house property, assessee is allowed a deduction under Section 24(b) for the interest paid on such borrowed capital up to Rs. 30,000 or Rs. 2,00,000 as the case may be. For instance, the assessee claimed a deduction of Rs. 3,00,000 as the interest paid on a housing loan. However, as per Section 24(b), only Rs. 2,00,000 (or Rs. 30,000) will be allowed. The assessee will not be eligible to claim the benefit of the remaining interest of Rs. 1,00,000 (or Rs. 2,70,000).

Even though the taxpayer was not allowed the deduction under Section 24(b) or any other provision of the Income Tax Act for the remaining interest, according to the strict interpretation of the proviso to Section 48(ii), this sum will continue to be ineligible for deduction under Section 48 because it was claimed by the taxpayer when filing the Income Tax Return. In other words, the proviso should disallow the deduction for the interest allowed as a deduction under Section 24(b) or Chapter VI-A.

It is recommended that the proviso be as under:

Provided that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed allowed on the amount of interest under clause (b) of section 24 or under the provisions of Chapter VIA.

18. Amount to Be Deposited Under Capital Gain Account Scheme Should Be Actual Sale Consideration and Not the Stamp Duty Value

Section 54F of the Income-tax Act allows exemption to an Individual and HUF from the long-term capital gains arising from transferring a capital asset other than a residential house property.

The exemption is allowed if the amount of net consideration is invested in a new house property within the prescribed time limit. If such net consideration is not invested by the due date of filing the income-tax return, then the assessee is required to deposit the amount in the capital gain account scheme.

‘Net Consideration’ is the full value of the consideration received or accruing from the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. However, it ignores a few situations where the net consideration to be invested will fall short of money available in hand, such as:

• Where stamp duty value is higher than the full sales consideration;
• Deduction of tax at source (TDS) by the purchaser while remitting sales consideration; and
• Receipt of consideration in instalments.

In all of the situations mentioned above, the actual amount received by the person is less than the sales consideration used for the computation of capital gains. Thus, there would be a shortfall in the amount required to be invested in the capital gain account scheme to claim Section 54F exemption. The Assessing Officer often challenges Section 54F exemption by concluding that the assessee was required to deposit sales consideration, which was taken into consideration for computing capital gains.

The Delhi Tribunal has ruled[6] that while computing exemption under Section 54F, the actual sale consideration received was to be taken into account and not stamp duty valuation under Section 50C.

It is recommended that Govt. should revisit the definition of ‘net consideration’ to bring clarity under the law so as to avoid any litigation.

19. Taxability of Capital Gains in Case of a JDA Entered into by Assessees Other Than an Individual or HUF

The Finance Act, 2017 inserted sub-section (5A) in Section 45 to provide that capital gains arising in the case of JDAs shall be chargeable to tax in the year in which the competent authority issues a completion certificate. This provision is applicable only in cases where the owner of immovable property is an Individual or HUF. The law does not provide taxability if any other assessee has entered into JDAs. Thus, it is recommended that the Govt. should bring clarity regarding the taxability of capital gains in case JDAs are entered into by any assessees other than an Individual or HUF.

Read More Computation of Capital Gains in Case of Joint Development Agreements (JDA) on Taxmann.com/Practice

20. Capital Gain Provisions Should Not Contain the Reference of Any Particular Year in Respect of the Sovereign Gold Bonds Scheme

Sovereign Gold Bond (SGB) Scheme is an investment scheme of the Central Government which offers investors an alternative to holding gold in physical form. There are several benefits of investing in SGBs. An individual is not liable to pay capital gain tax on the redemption of SGBs. Section 47 of the Income-tax Act provides that any transfer of Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual shall not be treated as a transfer for the purpose of capital gain.

Section 47 refers to the Sovereign Gold Bond issued under the Sovereign Gold Bond Scheme, 2015. However, the Central Government issues a new Sovereign Gold Bond scheme every year. Thus, section 47 should be suitably amended to remove reference to any particular year from the Sovereign Gold Bond Scheme.

A similar amendment is also required under the Fourth proviso to Section 48, which provides the benefit of indexation while computing long-term capital gain arising from the transfer of Sovereign Gold Bond.

Read More Transactions Not Regarded as ‘Transfer’ for Capital Gains on Taxmann.com/Practice

 D. Expectations and Recommendations for the ‘Crypto Currencies’

21. Clarity Over ‘Situs of VDA’ to Determine Taxability in India

The Finance Act, 2022 introduced a new ‘flat rate’ scheme under Section 115BBH for the taxation of income arising from the transfer of Virtual Digital Assets (‘VDA’) with effect from the assessment year 2023-24. This scheme applies evenly to both resident and non-resident assessees.

To determine the taxability of the income arising to a non-resident from the transfer of VDA, among other factors, one needs to identify the situs of VDA. If the situs of a VDA is in India, the income arising to a non-resident on its transfer shall be taxable in India subject to the provisions of Section 9(1)(i) and DTAA. The situs/location of an asset matters only for non-resident assessees and not ordinarily resident assessees. In the cases of these assessees, if an asset located outside India is transferred outside India and sale proceeds are received outside India, no taxability arises because of Section 5 of the Act [except in the case of shares/interest as referred to in Explanation 5 to Section 9(1)(i)]. Such assessees will only be taxed in India in respect of income accruing or arising through the transfer of any property, asset or capital asset situated in India.

Section 115BBH of the Act only provides for the tax rate and how income from the transfer of VDA shall be computed, and it does not provide for the determination of the situs of such assets. Thus, it is recommended that the Govt. should bring clarity over the determination of the situs of VDA to avoid any unwanted litigation.

A reference may also be taken from the HMRC’s guidance on “Crypto-assets: tax for individuals”, which included a section on the situs of crypto-assets. The HMRC guidance states that ‘throughout the time an individual is UK resident, the exchange tokens they hold as beneficial owner will be located in the UK.’ In other words, the situs will track the residence of the holder.

Read More Taxation of Virtual Digital Assets (VDAs) on Taxmann.com/Practice

22. VDA May Include Crypto ETFs

Section 115BBH contains a special provision for the taxation of income arising from the transfer of Virtual Digital Assets (VDA). Section 2(47A) defines the meaning of “virtual digital asset”. It covers the following three classes of VDA:

• Information or code or number or token generated through cryptographic means;
• Non-fungible token; and
• Any other digital asset as notified by the Central Government.

Any income arising from the transfer of these assets will be taxable at a flat rate of 30% under Section 115BBH. However, there is no clarity on the taxability of the income arising from the derivatives of these assets, like Bitcoin Spot or Future ETFs (Exchange-Traded Funds).

Until January 10, 2024, investors had a singular option to invest in Bitcoin: a direct investment through various unregulated or semi-regulated exchanges. A notable development occurred when the US SEC approved the inaugural list of Bitcoin Spot ETFs, which presented investors with two alternatives: direct investment and investment through Bitcoin Exchange-Traded Funds (ETFs). It is worth noting that Bitcoin ETFs are not a recent development. Previously, the US SEC granted approval for Bitcoin futures ETFs. The recent announcement is specific to Bitcoin Spot ETFs. In this scenario, the ETF will directly purchase Bitcoin, distinguishing it from the earlier futures-based ETFs.

The Bitcoin Spot ETF allows investors to take Bitcoin exposure without possessing the cryptocurrency directly in digital wallets or hard disks. This will eliminate the concerns about potential cyber hacks and the intricacies of managing complex passwords when stored on hard disks. The Bitcoin ETFs will be listed on Nasdaq, NYSE and the CBOE.

A crucial question arises regarding the tax implications of an Indian resident individual investing in Bitcoin ETFs in the US market. The issue is whether the long-term capital gains arising from the sale of Bitcoin ETFs should be subject to taxation under Section 115BBH, Section 50AA, or Section 112.

Section 50AA may not apply to tax gains arising from the transfer of such units, given the absence of SEBI approval for Bitcoin ETFs. The approval from SEBI serves as a crucial determinant in this context. Similarly, Section 115BBH may only apply if Section 2(47A) explicitly includes Bitcoin ETFs within the definition of Virtual Digital Assets (VDAs).

In the absence of such inclusion, the taxation of long-term capital gains from transferring units of Bitcoin Spot ETFs should be covered under the residuary provisions of Section 112. Regarding short-term capital gains resulting from the transfer of units within 24 months or less, taxation should follow the applicable tax rates for the assessee.

The government is expected to include Bitcoin ETF in the definition of VDAs. Alternatively, the CBDT may issue a notification to include it in the residuary clause of any other notified digital asset.

23. Section 50AA and Section 115BBH Should Have the Provision to Authorise CBDT to Prescribe the Method of Computation of Fair Market Value

The Finance Act, 2022 introduced a flat rate scheme for taxation of income arising from the transfer of Virtual Digital Assets (‘VDA’) with effect from the assessment year 2023-24. Every transaction of transfer of virtual digital asset on or after 1-4-2022 shall be covered under this scheme. The Finance Act 2023 inserted a special provision in Section 50AA for the computation of capital gains arising from the transfer, redemption, or maturity of a Market-Linked Debenture (“MLD”) or Specified Mutual Fund (“SMF”). For discussion in subsequent paragraphs, VDAs, MLDs and SMFs are collectively called as specified assets.

If a specified asset is exchanged for another asset or the consideration is received in kind, the fair market value of the asset obtained shall be treated as the full value of consideration. However, where the consideration is not ascertainable or cannot be determined, then the fair market value of the specified asset transferred shall be deemed to be the full value of the consideration as per Section 50D.

However, unlike Section 50CA (unquoted shares) or Section 50B (slump sale), Section 50AA and Section 115BBH neither provide the method of computation of fair market value nor give the CBDT power to prescribe it.

As MLDs and SMFs are listed on the stock exchange, it is possible to compute the FMV of these assets with certainty to some extent. However, there are practical difficulties in determining the market value of cryptocurrencies due to the high fluctuation in value, and exchange platforms may have different prices for the same cryptocurrency at any point in time. For example, the price of a Bitcoin on 14^th May 2024 at 3:00 PM at:

• Wazirx was Rs. 54,36,322;
• Coinswitch was Rs. 54,82,461.

Therefore, bringing clarity on this issue in this budget is highly recommended.

E. Expectations and Recommendations for ‘Charitable Trusts’

24. Consequential Amendment to Section 13(9)

As per Section 11(2), if a trust cannot apply 85 per cent of its income in a particular year, it can accumulate the shortfall to be used for religious or charitable purposes within the next 5 years. This accumulation is allowed if the assessing officer is informed about the purpose of the accumulation and the period for which the income is being accumulated. This information is to be furnished in Form 10.

The Finance Act, 2023 has preponed the due dates by two months with effect from the assessment year 2023-24. Now, the information in Form 10 must be furnished at least two months before the due date specified under Section 139(1) for furnishing the return of income for the previous year.

Section 13 specifies the circumstances under which the exemptions under Section 11 and Section 12 would not be available to trusts. Section 13(9) provides that to claim the benefit of accumulation for five years, Form 10 and ITR need to be submitted before the due date.

Since section 11(2) has been amended to prepone the date to file Form 10 by two months, no consequential amendment has been made in Section 13(9). So, in a way, it implies that there will be no penal consequences if Form 10 is filed up to the due date to file an Income-tax return, i.e., there will be no withdrawal of exemption in respect of the accumulated amount.

The Central Board of Direct Taxes (CBDT) has also issued Circular No. 6/2023, dated 24-05-2023, clarifying that a trust will not be denied the benefit of accumulation even if Form 10 is not filed two months before the due date under Section 139(1). However, Form 10 must still be submitted on or before the due date for filing the ITR to avail of this benefit. Thus, the effect of the Finance Act 2023 amendment is effectively nullified by this circular.

To align with the department’s intent to have Form 10 filed two months before the ITR due date, it is recommended that:

• Circular be withdrawn
• A consequential amendment be made to Section 13(9) to reflect the revised filing schedule for Form 10

The underlying rationale for this amendment is that the due dates for filing Form 10 should precede the due date for filing the ITR and audit report. The current misalignment complicates auditors’ ability to report the details of Form 10 in the audit report, given that the due date to file the audit report in Form 10B/10BB is one month before the due date to file the ITR. Synchronising these dates would simplify compliance and reporting requirements.

F. Expectations and Recommendations for ‘TDS and TCS’

25. Section 194T Should Be Amended to Remove Practical Difficulties

The Finance (No. 2) Act 2024 inserted Section 194T in the Act, which requires every firm responsible for paying salary, remuneration, interest, bonus, or commission to its partners to deduct tax at the rate of 10% from such payments.

However, this newly inserted provision contains certain practical difficulties, which are mentioned below:

• A partner may introduce or withdraw capital for various reasons during the year. Temporary withdrawals may be repayable within the same year or adjusted against remuneration or interest at year-end. These transactions are not considered salary, commission, or remuneration when they occur.
• A partner’s remuneration may be fixed or based on the firm’s financial results, determined after finalising accounts. This makes the nature of the payment unclear at the time, creating ambiguity in applying Section 194T.
• Additionally, where the firm’s accounts are finalised after the due date to deposit the tax deducted in the last month (30th April), it may lead to interest and penalties on delayed TDS deposits, despite no fault of the assessee.

Accordingly, suitable amendments should be brought under Section 194T to remove practical difficulties.

26. Alignment Between Section 194-IA and Section 50C/Section 43CA

Section 194-IA provides that any person buying an immovable property from a resident seller shall deduct tax at the rate of 1% from the sales consideration or the stamp duty value of such property, whichever is higher. The tax shall be deducted if the amount of sales consideration or stamp duty value is Rs. 50 lakhs or more.

Section 50C/43CA contains the special provision for computation of the full value of consideration in case of transfer of immovable property. These provisions do not define ‘consideration’. On the other hand, Explanation (aa) to Section 194-IA provides that the “consideration for transfer of any immovable property” shall include all charges of the nature of club membership fee, car parking fee, electricity or water fee, maintenance fee, advance fee or any other charges of similar nature, which are incidental to the transfer of immovable property.

For deduction of tax Section 194-IA, the ‘consideration’ as referred to above is compared with the stamp duty value (SDV), and not the consideration before including the charges incidental to transfer. In other words, ‘consideration’ for Section 194-IA and Section 43CA differ when one buys directly from the builder. In the matter of resale flats, perhaps, ‘consideration’ for both Section 50C and Section 194-IA will tally in most cases. Thus, it is recommended that the common definition of ‘consideration’ is adopted for Sections 43CA, 50C and 194-IA by bringing in necessary amendments.

27. Section 194-IA Reference Should Be Included in Section 197

As per Section 194-IA, any person buying an immovable property from a resident seller is required to deduct tax at the rate of 1% from the sales consideration or the stamp duty value of such property, whichever is higher. The tax under this section shall be deducted if the amount of sales consideration or stamp duty value is Rs. 50 lakhs or more.

Section 197 of the Act allows an assessee to obtain a certificate for a lower tax deduction. Under this section, an assessee (deductee) can apply to the Assessing Officer to issue a nil or lower TDS certificate. Such a certificate is issued if the estimated tax liability of the assessee justifies no deduction of tax or deduction of tax at a lower rate.

However, this section specifically excludes various sections where the assessees can not apply for a nil or lower deduction certificate. This includes Section 194-IA. Therefore, an assessee cannot apply for a certificate of lower deduction or nil deduction for tax deduction on the sale of an immovable property, even if his estimated tax liability justifies such a certificate. The exclusion of Section 194-IA from the scope of Section 197 creates a lot of trouble in circumstances where the sales consideration of a property is below its stamp duty value. This discrepancy could arise from several factors, including market conditions, property conditions, location, legal restrictions, and economic factors. Consequently, levying tax under section 194-IA based on the stamp duty value may lead to unnecessary blockage of funds for the seller.

It is recommended that a provision should be created to apply for a lower TDS certificate, if not nil, in a situation where the stamp duty value is higher than the actual sale consideration.

28. Appeal Against the Order of AO for a Refund of Tax Deducted Under Section 195

The Finance Act 2022 inserted a new Section 239A to claim a refund on denying the obligation to deduct tax in certain cases. The deductor could file an application before the Assessing Officer to get the refund of tax deducted under Section 195 on any income (other than interest) if no tax deduction was required.

The Assessing Officer may make such inquiry as he considers necessary and pass an order in writing to either allow or reject such application within 6 months from the end of the month in which the application is received. However, the AO cannot reject an application without providing a hearing opportunity to the assessee. If the assessee is not satisfied with the order passed by the Assessing Officer, he may go into appeal under Section 246A against such order before the Commissioner (Appeals).

Before the insertion of Section 239A, a taxpayer had no recourse to approach the Assessing Officer to obtain a refund of the tax so deducted and paid. The taxpayer had to follow the appellate process under Section 248 by filing an appeal before the Commissioner (Appeals) to obtain a refund of such tax deducted and deposited to the Central Govt.

However, Section 249, prescribing manner and time limits for filing an appeal before CIT(A), still contains the reference to Section 248. Therefore, the necessary amendments shall be brought to substitute the reference of Section 248 with Section 239A in Section 249.

29. Define ‘Seller’ for TDS Under Section 194Q

The Finance Act, 2020 and Finance Act, 2021 had inserted Section 206C(1H) and Section 194Q under the Income-tax Act, respectively. These provisions require the collection or deduction of tax on the sale or purchase of goods, as the case may be.

Section 206C(1H) imposes an obligation on the seller to collect tax from the buyer of goods, and Section 194Q requires a buyer to deduct tax from the sum paid or payable to the seller of goods. As both sections apply to one transaction (sale and purchase of goods), a transaction might be covered under both provisions in some situations. Where it does, the buyer shall have the first obligation to deduct the tax. In other words, the seller will not have any obligation to collect tax under Section 206C(1H) in such a scenario.

A transaction always involves two parties – seller and buyer. Thus, it is imperative to define the meaning of the ‘seller’ and ‘buyer’ in both sections. Section 206C(1H) defines both ‘seller’ and ‘buyer’. However, Section 194Q defines the meaning of ‘buyer’ only. With regard to the seller, it is provided that the seller can be any person resident in India, but its meaning has not been defined explicitly.

Further, the Government can exclude any person from such definitions. For instance, the Central Government or the State Governments are not treated as buyers. Thus, a seller shall not be liable to collect tax where the goods are sold to the Central Government or the State Governments. Hence, there will be no cash inflow in the hands of the Central Government on account of TCS.

However, in the inverse situation under Section 194Q, where the Central Government or State Governments are the sellers of goods, the buyer would deduct tax from the sum paid or payable to the Government because Section 194Q applies to selling goods to any person resident in India without any exception. Thus, in this case, the Central Government or State Government, being a seller, would receive sale proceeds net of TDS.

Considering the ambiguity, the CBDT issued Circular No. 20, dated 25-11-2021, to clarify that the Central Government or the State Government will not be considered a ‘seller’ for tax deduction under Section 194Q. It is recommended that the Government amend Section 194Q to provide the meaning of ‘seller’ in the provision itself.

Read More TDS on Purchase of Goods on Taxmann.com/Practice

30. Seller for the Purpose of TCS Under Section 206C(1F) Should Include Individual or HUF

The Finance Act, 2016 inserted sub-section (1F) to Section 206C to bring high-value transactions within the tax net. This provision provides that every person, being a seller, who receives any amount as consideration for the sale of a motor vehicle of the value exceeding Rs. 10 lakhs, shall collect tax from the buyer at the rate of 1% of the sale consideration.

The term ‘seller’ has been defined under clause (c) of Explanation to Section 206C. This clause defines the meaning of seller with respect to sub-section (1) and sub-section (1F) of Section 206C. However, to include an individual or a HUF within the meaning of ‘seller’, it provides that total sales, gross receipts or turnover of such individual or HUF from the business or profession carried on by him should exceed Rs. 1 crore in case of business or Rs. 50 lakh in the case of the profession during the financial year immediately preceding the financial year in which the goods of the nature specified in the Table in sub-section (1) are sold. This Explanation has inadvertently omitted to give a reference of sub-section (1F) of Section 206C.

It is recommended that clause (c) of the Explanation to Section 206C should be amended to mention the reference of sub-section (1F) also. This Explanation should read as under:

“seller” with respect to sub-section (1) and sub-section (1F) means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or cooperative society and also includes an individual or a Hindu undivided family whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which the goods of the nature specified in the Table in sub-section (1) or sub-section (1F) are sold.

Read More Tax Collected at Source (TCS) on Taxmann.com/Practice)

31. Need for an Enabling Provision to Deduct Tax Under Section 194N as Cash Withdrawn is Not an Income

Section 194N was introduced by the Finance (No. 2) Act, 2019, which was subsequently substituted with a new provision by the Finance Act, 2020. This provision requires deduction of tax at source from the cash withdrawn by a person from his account maintained with a bank, cooperative bank or a post office.

Section 194N is covered under Chapter XVII which relates to the collection and recovery of tax. Section 4 and Section 190 contain the enabling provisions for the deduction and recovery of tax.

Section 4(1) provides that income tax shall be levied in respect of the total income of the relevant year. Section 4(2) provides that in respect of income chargeable under sub-section (1), income tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

Section 190 relates to the deduction/collection of tax and payment of advance tax. Sub-section (1) of the said section provides that:

“Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) of section 192, as the case may be, in accordance with the provisions of this Chapter.”

This provision explicitly provides that the collection and deduction of tax shall be made in respect of the income of the assessee. If the amount received cannot be categorised as income in the hands of the receiver on which tax is leviable, no tax can be deducted/collected at source.

TDS on cash withdrawal was introduced to promote a cashless economy and discourage payments in cash. Section 194N requires tax deduction from the amount withdrawn from the accounts. However, it contradicts with provisions of Section 4 and Section 190. There is no income component in cash withdrawn from a bank account, thus, the question of TDS should not arise.

The Supreme Court has affirmed this proposition in the case of CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 178 Taxman 505 (SC) that if a particular income falls outside section 4(1), then TDS provisions cannot come in. The Madras High Court, in the case of Tirunelveli District Central Co-operative Bank Ltd. v. JCIT [2020] 119 taxmann.com 21 (Madras), has also held that tax cannot be deducted under Section 194N if cash withdrawn is not an income of the account holder.

Thus, it is expected that Govt. may bring a suitable amendment under the law to end any possible litigation on this provision.

Read More TDS on Cash Withdrawals on Taxmann.com/Practice

32. Consequential Amendment Needed in the Proviso to Section 206C(5) Due to Omission of Section 203AA

The Proviso to Section 206C(5) provides that the Director-General of Income-tax (Systems)/NSDL or the person authorised by it shall prepare and deliver to the buyer referred to in Section 206C(1) or to the licensee or lessee referred to in Section 206C(1C), a statement specifying the amount of tax collected and other prescribed particulars. Section 203AA, read with Rule 31AB, provides that such a statement is required to be furnished in Form No. 26AS by the 31^st of July following the financial year during which taxes are collected.

The Finance Act, 2020, has omitted Section 203AA with effect from 01-06-2020, and a new section 285BB has been introduced from the same date. Consequently, the CBDT omitted Rule 31AB. A new Rule 114-I has been inserted to provide that the Principal Director General of Income-tax (Systems), the Director-General of Income-tax (Systems) or any person authorised him shall upload such annual information statement in Form No. 26AS in the registered account of the assessee.

As Section 203AA has been omitted, corresponding omissions must also be made in the provisions of TCS. Thus, it is recommended that the Government should make consequential amendments by omitting Proviso to Section 206C(5).

Read More Annual Information Statement (AIS) on Taxmann.com/Practice

33. Enhance the Scope to Apply for a Lower Tax Collection Certificate

An assessee can apply to the Assessing Officer to issue a certificate for collection of tax at lower rates under section 206C(9). Such a certificate shall be issued if the existing and estimated tax liability of the assessee justifies tax collection at a lower rate. This benefit is only available to the persons covered under sub-section (1) and (1C) of section 206. The assessee covered under sub-section (1F) (sale of motor vehicle), (1G) (remittance of foreign currency under LRS or sale of an overseas tour package) and (1H) (sale of goods) does not have the option to approach the assessing officer to issue lower tax collection certificate. It is suggested that the benefit of applying for a lower collection certificate shall also be extended to the persons covered under sub-sections (1F), (1G) and (1H) of section 206C.

Read More Certificate to Collect TCS at Lower Rate on Taxmann.com/Practice

34. Deduction of Tax on Dividends Paid by Any Mode Other Than Cash

Section 194 provides for the deduction of tax from dividends. The tax has to be deducted by every Indian company or company that has made the arrangements for the declaration and payment of dividends within India. However, no tax shall be deducted from the payment of dividends to an individual shareholder if the payment is made by any mode other than cash and the aggregate amount of dividend paid or distributed to him during a financial year does not exceed Rs. 5,000.

The relaxation from the deduction of tax is available if the dividend is paid by any mode other than cash. This provision provides a negative list of the prohibited mode of payment. Whereas various provisions, inter-alia, Section 40A(3), Section 269SS, Section 269T, Section 269ST, etc., provide a positive list of the permissible mode of payment. Therefore, it is recommended that similar to other provisions Section 194 should have a positive list of the permissible mode of payment, that is, an account payee cheque or account payee bank draft or use of an electronic clearing system through a bank account or through such other electronic mode as may be prescribed.

A similar amendment is also recommended in Sections 80D, 80GGA, 80G and 36(1)(ib).

G. Expectations and Recommendations for ‘Business Trusts’

35. Long-term Capital Gain Referred to in Section 112A Should Be Taxed at 10% Instead of MMR in the Hands of Business Trust

A business trust (REIT or InVIT) is governed by Section 115UA, read with Section 10(23FC), 10(23FCA) and Section 10(23FD) of the Income-tax Act. A business trust is structured as a hybrid pass-through entity, allowing it to pass certain income to its unit-holders. Consequently, such incomes are exempt at the level of business trust and taxable in the hands of the unit-holders.

The incomes that a business trust is allowed to pass through to its unit holders are as follows:

• Dividend received from SPV;
• Interest received from SPV; and
• Rental income from real estate properties directly owned by REITs.

The pass-through status is provided to the business trust only in respect of the aforesaid incomes, and all other incomes are chargeable to tax in the hands of the business trust. Such other income is taxable under Section 115UA at a maximum marginal rate (i.e., 42.744%) except the capital gains covered under Section 111A and Section 112. Section 111A provides for a concessional tax rate of 15% in respect of short-term capital gain arising from the transfer of listed equity shares, equity-oriented mutual funds or units of a business trust. Whereas Section 112 provides for a concessional tax rate of 20% in case of long-term capital gain.

The Finance Act, 2018, inserted a new Section 112A in the Income-tax Act to tax the income arising from the transfer of a long-term capital asset, being a listed equity share or a unit of an equity-oriented fund or a unit of a business trust at the rate of 10% on the amount of capital gain in excess of Rs. 100,000. However, no consequential amendment was made under Section 115UA. Thus, it is recommended that the capital gains covered under Section 112A should be charged to tax at the rate of 10% and not at MMR in the hands of the business trust.

Read More Tax on Long-term Capital Gain from Sale of Securities Chargeable to STT on Taxmann.com/Practice

36. Definition of SPV Under the Income-tax Act Should be the Same as Defined Under SEBI’s Regulations on REITs and InVITs

To boost investment in Real Estate and Infrastructure sectors, the Government introduced the concept of Real Estate Investment Trusts (REITs) and Infrastructure Investment trusts (InVITs).

REITs or InVITs are regulated by SEBI through SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014, respectively. The structure of REITs or INVITs is similar to that of a mutual fund, wherein money is collected from the general public for investing on their behalf in income-generating real estate properties or infrastructure projects. REITs or InVITs invest in real estate properties or infrastructure projects, respectively, either directly or through Special Purpose Vehicles (SPV). Under SEBI (Real Estate Investment Trusts) Regulations, 2014, SPV is defined as a company or LLP in which REIT holds at least 50% of the equity share capital or interest. Whereas, under SEBI (Infrastructure Investment Trusts) Regulations, 2014, SPV is defined to mean a company or LLP in which InVIT holds the controlling interest and at least 51% of the equity share capital or interest. Further, under both regulations, SPV has to meet certain other conditions pertaining to investment and the nature of activities.

As far as tax implication of investing in REITs or InVITs is concerned, they are given pass-through status under the Income-tax Act whereby they are allowed to pass certain income, inter-alia, interest, rent and dividends received from SPV to their unit holders without paying the income-tax at their end. However, under Income-tax Act, SPV is defined to mean an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration. The definition of SPV as provided under the Income-tax Act is, to some extent, different from the definition as provided under aforesaid SEBI Regulations. The two basic differences in the definition of an SPV are as follows:

• As per SEBI Regulations, SPV can be an Indian company or LLP. However, the Income-tax Act recognises only an Indian company as SPV. Thus, if an SPV is incorporated as LLP, then pass-through status shall not be available to business trust in respect of income received from such SPV; and
• As per SEBI Regulations, REIT is not required to have a controlling interest in SPV. However, as per Income-tax Act, REIT should have the controlling interest and at least 50% equity shareholding in SPV.

Considering these differences in the definition of SPV under the Income-tax Act vis-à-vis SEBI Regulations, it is recommended to amend the definition of SPV under Income-tax Act to align it with the definition as provided under SEBI regulations.

Read More Taxation of REIT/InVIT on Taxmann.com/Practice

37. Clarification Required for Pass-through of Losses Incurred by Business Trust and Securitisation Trust

The tax is eliminated at the pool level and levied at the investor level in a pass-through regime. In other words, income earned by an entity is exempt from tax in its hands, and the same is taxable in the hands of its investor or unit-holders in the same manner and to the same extent as if the investment in underlying assets has been made directly by the investors.

In the Income-tax Act, three types of entities, namely Category I & Category II AIFs, Securitisation Trust and Business Trust, are accorded a pass-through status. Securitisation Trusts enjoy the pass-through status for the entire income, whereas others are provided with this status in respect of certain specified income only.

Income-tax Act contains provisions for the pass-through of income. However, there is no guidance on the treatment of losses incurred by them. The Finance (No. 2) Act, 2019, has amended Section 115UB to allow carry forward of losses, other than the losses under the head “Profits and gains of business or profession” at the investor level in case of Category I and II AIFs. The memorandum explaining the Finance (No.2) Bill, 2019, has explained the reasons behind such amendment as follows:

“Pass-through of losses are not provided under the existing regime and are retained at AIF level to be carried forward and set off in accordance with Chapter VI. In order to remove the genuine difficulty faced by Category I and II AIFs, it is proposed to amend section 115UB to provide that………”

However, no similar amendment has been made in respect of the Securitisation Trust and Business Trust.

Thus, it is recommended that Section 115UA and Section 115TCA should be amended to bring clarifications in this regard.

Read More Pass-Through Income on Taxmann.com/Practice

38. Income-tax Benefits to Business Trusts on the Issuance of Rupee Denominated Bonds

Rupee Denominated Bonds (RDBs) are an innovative type of bond linked to the Rupee but issued to overseas investors. As RDBs are issued and denominated in Indian currency, it protects Indian issuer from currency risk and transfers the risk of currency fluctuation to investors buying these bonds.

A person investing in RDBs can earn two types of income: interest and capital gains. To promote Rupee denominated borrowing from overseas, the Income-tax Act provides certain benefits in respect of income arising from RDBs, which are as follows:

Section	Issuer/Borrower	Investor/Assessee	Benefit
Interest Income
Section 10(4C)	Indian Company or Business Trust	Non-resident or Foreign company	Interest payable in respect of RDBs issued during the period between 17-09-2018 and 31-03-2019 is exempt from tax
Section 115A read with Section 194LC	Indian Company or Business Trust	Non-resident or Foreign company	Interest payable in respect of RDBs (if not exempt under section 10(4C)) is taxable at a concessional rate of 5% (or if bonds are listed on a recognised stock exchange in IFSC, the tax rate is 4% if bonds are issued before 01-07-2023 and 9% if bonds are issued on or after 01-07-2023)
Section 115A read with Section 194LD	Indian Company	Qualified Foreign Investor	Interest payable in respect of RDBs (if not exempt under section 10(4C)) is taxable at a concessional rate of 5%
Section 115AD read with Section 194LD	Indian Company	Foreign Institutional Investors	Interest payable in respect of RDBs (if not exempt under section 10(4C)) is taxable at a concessional rate of 5%
Capital Gains
Section 47(viiaa)	Indian Company	Non-resident	Transfer of RDBs by one non-resident to another non-resident outside India is not considered as ‘transfer’ for capital gain.
Section 47(viiab)	Indian Company	Non-resident	Transfer of RDBs by a non-resident on a recognised stock exchange located in any IFSC is not considered as ‘transfer’ for purpose of capital gain provided the consideration is paid or payable in foreign currency. Thus, no capital gain shall arise in such cases.
Section 10(4D)	Indian Company	Specified Fund	Transfer of RDBs on a recognised stock exchange located in any IFSC is exempt from tax provided the consideration is paid or payable in foreign currency.
Fifth proviso to Section 48	Indian Company	Non-resident	Gains arising on account of appreciation of Rupee against a foreign currency at the time of redemption of Rupee denominated bond shall ignored while computing capital gain.

The detailed guidelines for issuing Rupee Denominated Bonds overseas are set out in the RBI’s Circular No. 17, dated 29-09-2015, as amended from time to time. As per RBI Guidelines, any corporate or body corporate is eligible to issue Rupee Denominated Bonds overseas. Business Trusts (i.e., Real Estate Investment Trusts (REITs) or Infrastructure Investment Trusts (InvITs) ) are also eligible to issue RDBs.

Income-tax benefits (except under Section 10(4C) and Section 194LC) are allowed only when an Indian company issues the RDBs. But, as per RBI’s circular, business trusts can also issue RDBs. Thus, to remove this anomaly, it is suggested that the requisite amendment be brought under Section 194LD, Section 47, and Section 48, and the benefit should be allowed even if business trusts issue the RDBs.

H. Expectations and Recommendations for ‘Deductions & Exemptions’

39. Condition to Pay Emoluments by Specified Modes under Section 80JJAA Should Be Applicable in Case of New Businesses Also

Section 80JJAA of the Income-tax Act provides that every assessee earning business income and liable to the tax audit can claim a deduction under this provision for additional employee cost. The deduction shall be allowed for 30% of the additional employee cost in three assessment years.

However, such deduction shall be allowed only if the assessee fulfils certain conditions. One of the conditions is that emoluments must be paid by any of the following modes:

• An account payee cheque;
• Account payee bank draft;
• By use of electronic clearing systems through a bank account; or
• Other prescribed electronic modes, i.e. Credit/debit card, IMPS, RTGS etc.

This condition applies to existing businesses only. However, to move towards the digital India initiative, the above condition regarding payment of emoluments through the above modes may be extended to new businesses as well.

Read More Deductions in Respect of Employment of New Employees on Taxmann.com/Practice

40. Audit Might Be Necessary for Claiming Exemption Under Section 80-IBA

Deductions under Chapter VI-A are broadly categorised under 5 parts as follows:

• Part A – General
• Part B – Deductions in respect of certain payments
• Part C – Deduction in respect of certain incomes
• Part CA – Deduction in respect of other incomes
• Part D – Other deductions

Almost all sections providing profit-linked deductions under Part C of Chapter VI-A require an assessee to fulfil certain conditions. One of such conditions is to get the book of accounts audited by a Chartered Accountant and furnish a report of such audit electronically in the specified form (i.e., the audit report is furnished in Form 10CCB to claim deduction under Section 80-IA).

Deduction prescribed under Section 80-IBA is also a profit-linked deduction. This section provides that an assessee deriving profits and gains from the business of developing and building housing projects is eligible to claim a deduction under this provision. 100% of the profits and gains derived from this business are deductible under this provision. To claim the deduction, the assessee has to comply with various conditions as to the size of the plot of land, residential unit, stamp duty value, and the time limit for completing the project. However, the condition of getting the books of account audited is not a prerequisite for claiming this deduction.

It is expected that Section 80-IBA, being a profit-linked deduction, would also require the assessee to get his book of accounts audited to be eligible to claim such a deduction.

Read More Profits from Housing Projects on Taxmann.com/Practice

I. Expectations and Recommendations for ‘Other Incomes’

41. No Tax on Interest on Compensation Received in Appeal

The compensation received from the insurance company for motor accident claims is classified as a capital receipt and therefore not subject to taxation. However, there remains a dispute regarding the taxation of interest paid as compensation for delayed payment of insurance claims. Section 194A(3)(ixa) provides an exemption for interest on compensation awarded by the Motor Accidents Claims Tribunal, provided the interest amount does not exceed Rs. 50,000.

The various courts[7] have held that interest paid on delayed payment of compensation under motor accident claims does not come within the ambit of Section 2(28A). Thus, it would be appropriate to explicitly provide that the entire compensation amount and any accompanying interest paid to claimants shall be exempt from tax.

42. Relaxation from 1^st Proviso to Section 68 in Case of Loans Taken from Banks

Section 68 of the Income-tax Act provides that if any sum is found credited in the books of accounts and the assessee offers no explanation about the nature and source thereof or the Explanation offered by him is not satisfactory, in the opinion of the Assessing Officer, the sum so credited may be charged to income tax as the income of the assessee of that previous year.

The Finance Act, 2022 inserted a new proviso to provide that the nature and source of the loan, borrowing or any other liability credited in the books of an assessee shall be treated as explained only if:

• the person in whose name such credit is recorded also offers an explanation about the nature and source of such sum so credited; and
• In the opinion of the Assessing Officer, such an explanation has been found to be satisfactory.

This newly inserted proviso emphasises the sum credited by way of loans, borrowings or any other liability of an assessee, irrespective of the status of the lender.

Thus, it has created a genuine hardship for those who have obtained loans from Banks, NBFCs, and Public Financial Institutions. There should be no question about the genuineness and creditworthiness of loans taken from these institutions. Therefore, it is recommended that Govt. amends Section 68 to carve out an exception for the loans taken from these institutions.

J. Expectations and Recommendations for ‘Penalties’

43. Reference of Section 271AA and 271G is Required in Section 253

Section 271AA lays down the penalty for failure to keep information in respect of an International Transaction. Under this provision, AO or CIT(A) may impose a penalty of a sum equal to 2% of the value of each international transaction or specified domestic transaction entered into by the taxpayer.

Similarly, Section 271G imposes a penalty for failure to furnish Information or documents relating to International Transactions. Under this section, the AO or TP Officer or CIT(A) may impose a penalty of a sum equal to 2% of the value of the international transaction or specified domestic transaction for each such failure.

Section 253 enlists the orders against which appeals to the Appellate Tribunal can be filed. It should be noted that the reference to Section 271AA and Section 271G still needs to be included in Section 253. Both these provisions give the CIT(A) powers to levy a penalty for failure to keep and furnish information relating to the international transaction.

Thus, it is recommended that a reference be provided for orders passed under Sections 271AA and 271G under Section 253.

44. Start-ups May be Penalised for Not Fulfilling Conditions Under Section 80-IAC

Section 80-IAC does not contain any provision to withdraw the deduction if the start-up fails to fulfil the prescribed conditions. It is apprehended that an amendment could be made to Section 80-IAC to withdraw the deduction if the assessee company fails to comply with the conditions prescribed in the DPIIT’s notification.

Read More Deduction to an Eligible Start-up on Taxmann.com/Practice

K. Expectations and Recommendations for ‘Prosecutions’

45. Proviso to Section 276B Granting Relief from TDS-related Prosecution Should have Retrospective Effect

Section 276B provides that failure to deposit TDS as required under Chapter XVII-B or to pay/ensure payment of tax as mandated under Section 115-O(2), the proviso to Section 194B, the first proviso to Section 194R(1), the proviso to Section 194S(1), or Section 194BA(2) is punishable with rigorous imprisonment for a term ranging from 3 months to 7 years, along with a fine.

Further, Section 276BB provides for the launch of prosecution if a person fails to pay the tax collected by him. Such an offence is punishable with rigorous imprisonment of 3 months to 7 years and with a fine.

The Finance (No. 2) Act 2024 has inserted a proviso to Section 276B to provide immunity from prosecution for failure to deposit TDS if payment has been made to the government’s credit at any time before filing the TDS return. This proviso has been inserted with prospective effect. Consequently, no immunity is provided in the pending case.

It is recommended that this proviso should be given a retrospective operation to provide immunity in the old cases. Further, it is recommended to introduce a similar provision in Section 276BB to offer relief in prosecutions related to TCS.

Read More Prosecution for Failure to Pay Tax Deducted at Source on Taxmann.com/Practice

46. Prosecution Under Section 276C(2) Should be Contingent Upon Assessment

Section 276C is a widely used section for initiating prosecution proceedings. The basic difference between sub-section (1) and sub-section (2) of Section 276C is that the former is attracted in cases where there is a wilful attempt to evade any tax, penalty or interest, whereas the latter is attracted when there is a wilful attempt to evade the payment of tax, penalty or interest.

The logical corollary is that to attract the provision of Section 276C(2), there should be an already determined tax, the payment of which is wilfully evaded by the assessee. However, the existence of a pre-determined tax is not a condition to be satisfied for attracting the provision of Section 276C(1).

It is also stated that both sections use the word “wilfully”. However, the word wilfully is not defined and thus left to the officer’s discretion. Thus, to remove the ambiguity, the following changes should be proposed under Section 276C.

• A proviso should be inserted that sub-section (2) of Section 276C shall not apply unless the assessment determining the tax demand is made.
• A proviso should be inserted that sub-section (2) of Section 276C shall not apply if the appellate authority has provided the relief to the assessee in regard to the alleged tax evaded as referred to in sub-section (1) of Section 276C.

In other words, the prosecution under Section 276C(2) should be linked with the assessment outcome.

Read More Prosecution for Wilful Attempt to Evade Tax on Taxmann.com/Practice

47. Limit Section 276CC Prosecution to Proven Cases

A prosecution is launched under Section 276CC if a person fails to furnish the return of income, which he is required to furnish under Section 139(1) or in pursuance of a notice issued by the Income-tax authorities. Such an offence is punishable with rigorous imprisonment of 3 months to 7 years and with a fine.

This provision applies when a person who is otherwise required to furnish the return of income does not wilfully furnish the same either under the stipulated time mentioned under Section 139(1) or in reply to a notice given under Section 142(1). It has been observed that prosecutions under this provision are launched against individuals merely because they fail to furnish the income tax return for any particular year.

This provision is harsh for senior citizens who could not file the return due to any unforeseen or pressing reasons. They have to face the rigours of this provision. Therefore, this provision overreaches the intent for which it was introduced, and a modification is sought.

Thus, it is recommended that Section 276CC should apply only with corroborating evidence of the assessee’s ITR obligation, excluding marginalised taxpayers like senior citizens, women, and those below the exemption limit.

Read More Prosecution for Failure to Furnish Return of Income on Taxmann.com/Practice

48. Streamline Provisions Related to Prosecution for Making False Statements

A prosecution is launched under Section 277 if a person makes a false statement in any verification under this Act or delivers an account or statement that is false. Such an offence is punishable with rigorous imprisonment of 3 months to 7 years and a fine.

The legislature has linked clause (i) of Section 277 with the amount of tax that would have been evaded. However, there is no such condition in clause (ii) of Section 277. In other words, even if there is no tax evasion, AO can initiate a prosecution under clause (ii) to Section 277.

It is recommended that Section 277 be amended by inserting the term “willfully” in its opening line to differentiate unintentional mistakes from deliberate ones and ensure they align with other prosecution provisions. The revised text would penalise only those who willfully make false statements. Additionally, prosecution under clause (i) should be linked to the outcome of assessment or appellate proceedings, exonerating the assessee based on the final decision.

Read More Prosecution for Making False Statement in Verification on Taxmann.com/Practice

49. Prosecution Under Section 277A Should Apply to Both Parties Involved

Prosecution under Section 277A should be initiated for both parties involved in the offence rather than solely targeting the person enabling the wilful default.

Currently, Section 277A penalises a person (the “first person”) who makes or causes a false statement or entry to assist another person (the “second person”) in evading tax, penalty, or interest. While the provision holds the first person accountable for enabling the tax evasion, it does not extend prosecution to the second person, despite their active involvement.

To address this inconsistency, it is recommended that prosecution should apply to both the first and second persons involved in the offence, recognising their joint responsibility in facilitating tax evasion.

Read More Prosecution for Falsification of Books of Account or Document, etc. on Taxmann.com/Practice

50. A Sunset Clause Should be Added to Section 278AB

Section 278AB allows a person to apply for immunity from prosecution, subject to certain conditions. However, with the repealing of the settlement provisions effective from 1st February 2021 and the Interim Board of Settlement now holding the authority to grant immunity, the provision under Section 278AB has become redundant. Therefore, a sunset clause is expected to be inserted to limit the continued applicability of this section.

Read More Immunity from Prosecution on Taxmann.com/Practice

51. Show Cause Notice Must be Issued to the Assessee Before Launching Prosecution Proceedings

Section 279 requires sanction before initiating prosecution, safeguarding the assessee’s interests. However, it does not explicitly mandate a hearing opportunity, though it’s prescribed in the Prosecution Manual. Section 279(2) allows compounding of the offence, but the process lacks a clear timeline.

Thus, it is recommended that Section 279(1) should be amended to provide an opportunity for the assessee to hear before the prosecution is sanctioned. Further, a clear timeline for disposing of compounding applications should be introduced to ensure they are not rejected for minor procedural faults, allowing time for rectification.

Read More Prosecution at the Instance of Commissioner on Taxmann.com/Practice

L. Expectations and Recommendations for ‘Appeals & Assessments’

52. Stay Granted by ITAT Should Not Be Vacated Automatically After the Expiry of 365 Days

Section 254(2A) of the Act contains provisions for the disposal of appeals by the Tribunal. The first proviso to Section 254(2A) provides that if an assessee makes an application for the stay of proceedings, the Tribunal may, after considering the merits of the application, pass an order of stay for a period not exceeding 180 days from the date of the order. The Tribunal shall dispose of the proceedings within that period of stay.

Where the Tribunal does not dispose of the appeal within the original period of stay, and the delay is not attributable to the assessee, the Tribunal may extend the period of stay for a total period of 365 days (365 days including 180 days granted previously).

Further, the third proviso to Section 254(2A) provides that if the Tribunal does not dispose of the appeal within the period allowed (original plus extended), the order of stay shall stand vacated after the expiry of 365 days even if the delay in disposing of the appeal is not attributable to the assessee.

In Dy. CIT v. Pepsi Foods Ltd. [2021] 126 taxmann.com 69 (SC), the Supreme Court has held that the object of the third proviso to Section 254(2A) (i.e., automatic vacation of stay on completion of 365 days even if the assessee is not responsible for the delay) is discriminatory and is liable to be struck down as it violates Article 14 of the Constitution of India. The Apex Court further held that the third proviso should be read without the word “even” and “is not”. Thus, any order of stay shall stand vacated after the expiry of the mentioned period only if the delay in disposing of the appeal is attributable to the assessee. After these words are struck down, the third proviso shall be read as under:

Provided also that if such appeal is not so disposed of within the period allowed under the first proviso or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee.

Thus, it is expected that the Govt. may bring an amendment in the third proviso to Section 254(2A) as held by the Hon’ble Supreme Court in the above case.

Read More Appeal Before Income Tax Appellate Tribunal (ITAT) on Taxmann.com/Practice

53. Enhance the Scope of Not Being an Assessee-in-default

If any person responsible for the collection of tax at source fails to collect the whole or any part of the tax or, after collection fails to deposit the same to the credit of the Central Government, then he shall be deemed to be assessee-in-default. A collector is not deemed to be in default if the amount is received from a person who has considered such an amount while computing income in return and has paid the tax due on such declared income. The receiver will have to obtain a certificate to this effect from a Chartered Accountant in Form No. 27BA and submit it electronically.

However, this relief is allowed only in respect of sub-sections (1) and (1C) of section 206C. It is recommended to extend this benefit to the persons covered under sub-section (1F), (1G) and (1H) of Section 206C.

Read More Assessee-in-Default on Taxmann.com/Practice

M. Other Expectations and Recommendations

54. Non-residents Should Be Excluded From Mandatory ITR Filing Where They Incur on Foreign Travel

Section 139 lays down the provisions relating to furnishing the return of income. It prescribes that every person other than a company or firm shall furnish the return of income if his total revenue during the previous year exceeds the maximum amount not chargeable to income tax. The proviso to Section 139(1) prescribes various conditions under which the assessee is required to furnish the return of income even if the total income during the previous year does not exceed the maximum amount not chargeable to tax. The following conditions are prescribed:

• He has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more current accounts maintained with a banking company or a cooperative bank,
• He has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for himself or any other person for travel to a foreign country,
• He has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards consumption of electricity,
• He fulfils such other conditions as may be prescribed.

Since these conditions apply to everyone except a company or firm, such conditions will also apply to non-residents. Consequently, where the non-residents do not have income exceeding Rs. 2.5 lakh but has foreign travel exceeding Rs. 2 lakhs could be held liable to furnish the return of income even if their income during the previous year is below the maximum amount, which is not chargeable to tax.

Therefore, an amendment to Section 139 is recommended to exclude non-residents from the applicability of these provisions.

Read More Return of Income on Taxmann.com/Practice

55. Section 90/90A Does Not Empower AO to Issue TRC to a Resident Person

Though sub-rules (3) and (4) of Rule 21AB prescribe the process of obtaining a tax residency certificate (TRC) by a person resident in India, but no provision under Section 90 or Section 90A empowers either the CBDT or the Government to issue rules concerning the issuance of TRC to a resident person. Therefore, it is recommended that the Government amend these sections to include provisions that empower the requirement and issuance of TRCs to residents.

Read More Documents for Claiming Relief under DTAA on Taxmann.com/Practice

56. Delay in Handing Over Seized Material Beyond 60 Days Should Not Invalidate Search

Section 132(9A) provides that if the authorised officer lacks jurisdiction, seized assets are required to be handed over to the relevant Assessing Officer within 60 days, who will then exercise the powers under subsections (8) or (9) to section 132.

There is no clarity under the statute regarding the consequences in case seized material is not handed over by the authorised officer to the Assessing Officer within 60 days.

The Gujarat High Court ruled that[8] the limitation period prescribed by section 132(9A) should be interpreted to be an administrative direction and not a judicial one, and non-compliance cannot make the search vitiated.

Thus, a suitable amendment should be made to clarify that the search shall not be invalidated even if the seized assets are not handed over to the relevant Assessing Officer within 60 days.

57. Time Limit Should Be Provided Within Which the Seized Documents Should Be Provided to the Assessee

Section 132(10) provides that if a person entitled to seized documents objects to the approval given by the authorities under Section 132(8), he can apply to the Board with reasons for the objection and request the return of the documents. After hearing the applicant, the Board may pass suitable orders.

Though the Act specifically provides for supplying copies of books of account or other documents seized during the search, no time limit has been prescribed.

In the absence of a prescribed time limit, it has been observed that the authorised officer seldom gives the assessee copies of the books of account and documents seized during the search. Therefore, to achieve the desired objective, the provisions regarding the time limit for supplying copies of documents and papers seized need to be rationalised.

58. Reference to Corresponding New Criminal Major Acts (BNS and BNSS)

The Indian Penal Code, 1860 (IPC), and Code of Criminal Procedure, 1973 (CrPC), have been replaced with Bharatiya Nyaya Sanhita, 2023 (BNS), and Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS), respectively. However, various provisions of the Income-tax Act still refer to these repealed Acts. Therefore, it is recommended that the relevant sections of the IT Act make the necessary corrections to replace the old criminal laws with the new criminal laws of BNS and BNSS.

Here is an index of the relevant sections of the IT Act that should be amended to provide the correct references of the new criminal major Acts:

• Section 2(37) – Definition of ‘Public Servant’
• Section 132 – Search and seizure.
• Section 136 – Proceedings before income-tax authorities to be judicial proceedings.
• Section 245H – Power of Settlement Commission to grant immunity from prosecution and penalty.
• Section 245L – Proceedings before Settlement Commission to be judicial proceedings.
• Section 245MA – Dispute Resolution Committee.
• Section 245U – Powers of the Authority
• Section 255 – Procedure of Appellate Tribunal.
• Section 278AB – Power of Principal Commissioner or Commissioner to grant immunity from prosecution
• Section 279 – Certain offences to be non-cognizable
• Section 280A – Special Courts
• Section 280B – Offences triable by Special Court.
• Section 280C – Trial of offences as summons case.
• Section 280D – Application of Bharatiya Nagarik Suraksha Sanhita, 2023 to proceedings before Special Court.
• Section 291 – Power to tender immunity from prosecution.
• Section 292A – Section 401 of the Bharatiya Nagarik Suraksha Sanhita, 2023, and the Probation of Offenders Act, 1958, not to apply.

59. Tax Recovery Mechanism on Sale of Securitised Assets

Securitisation is a process that allows banks and other financial institutions to auction properties to recover the loan amount on the borrower’s failure to repay.

In most cases where the assets are taken over as part of the recovery of borrowing, there is no mechanism to ensure that the tax dues are secured in the process of the sale of properties.

The borrower has no money to pay the tax as he is already bankrupt or faces financial difficulties. Further, no part of the sale consideration reaches him as sale proceeds are collected directly by the bank or Asset Reconstruction Company (ARC). The banks or ARCs have no statutory obligations to make payments of taxes levied on the borrower.

The Mumbai Tribunal[9] has also highlighted this legal lacuna in tax recovery on the sale of securitised assets. Thus, it is recommended that the Government brings a suitable amendment to ensure that the tax liability is duly recovered from the borrower whose property is sold. Alternatively, it may be provided that if it is not possible to recover tax from the borrower due to financial difficulties, the tax dues may be recovered from the bank/ARC.

60. A Deduction Should Be Allowed for the ‘Maintenance Charges’ While Computing Income From Let-Out Property

Maintenance Charges are mandatory charges paid by the owner of a flat/house to the housing society for the upkeep and maintenance of the common area. These charges are not deductible under Section 23 while computing the income from house property. The proviso to Section 23(1) provides for the deduction of only taxes paid to the local authority. The Mumbai Tribunal, in the case of Rockcastle Property (P.) Ltd. v. ITO [2021] 127 taxmann.com 381 (Mumbai – Trib.), has affirmed that ‘society maintenance charges’ paid by the assessee, by no stretch of the imagination, could be held to be taxes paid to the local authority. Hence, it couldn’t be allowed as a deduction while computing income from house property.

As maintenance charges are compulsory and paid monthly or quarterly, it is recommended that Govt. should allow its deduction while computing the income from let-out and deemed let-out house properties.

Read More Computation of Income from House Property on Taxmann.com/Practice

61. The Definition of Government Employee Should Be Inserted

The Income-tax Act does not explicitly define the term ‘government employee’. A disparity exists in the tax treatments and exemptions available under various provisions to a government employee vis-à-vis an employee of a government-aided institution who receives benefits akin to those of a government employee.

For instance, Section 10(10) provides an exemption for the retirement gratuity received by an employee. It provides that the death-cum-retirement gratuity received by the employees of the Central Government, State Governments, local authorities and members of the defence services are totally exempt from tax. Similarly, Section 10(10A) exempts the lump sum amounts received upon commutation of pension by the employees of the Central Government, State Governments, local authorities, the corporation established by a Central, State or Provincial Act and members of the defence services. Section 10(10AA) provides an exemption to the leave salary encashment received upon superannuation or otherwise by the Central Government or a State Government employees. The same treatment is not extended to the employees of local authorities or corporations established under Central, State, or Provincial Acts.

These exemptions are not uniformly available to employees of government-aided institutions whose salaries are funded predominantly by the Central or State Government. A notable instance pertains to employees of state electricity companies formerly covered by the State Electricity Board, who are treated as State government employees eligible for various benefits. With the transition of these companies to entities incorporated under the Companies Act, it is necessary to reconsider the meaning of government employee for the exemption. It is recommended that a uniform exemption should be available for the gratuity, commutation of pension, and leave salary to the employees of the Central Government, State Government, local authorities, corporations, government-aided institutions, and PSU.

62. Extension of Sunset Dates Under Various Provisions

The Central Government has undertaken several measures to make the proceedings under the Act electronic by eliminating the personal interface between the taxpayer and the department to the extent technologically feasible and providing for optimal utilisation of resources and a team-based assessment with dynamic jurisdiction.

However, the deadline for issuing directions for the faceless schemes outlined in certain provisions has expired long ago. It is recommended that the government reconsider extending the sunset dates for the following provisions:

Section	Schemes Not Yet Notified	Limitation Period to Issue Directions Expired On
Section 157A	Rectification of mistake, demand notice or loss intimation	31-03-2022
Section 231	Proceedings relating to deduction or collection of tax	31-03-2022
Section 264A	Revision of order	31-03-2022
Section 264B	Giving effect to rectification or appeal order	31-03-2022
Section 279	Compounding of offence	31-03-2022
Section 293D	Granting approval or registration	31-03-2022

63. Meaning of the Term ‘Month’ and Computation Thereof

As per the provisions of section 201(1A), in case of failure to deduct TDS, interest is to be paid at the rate of 1.5% from the date of deduction to the date of payment. Any part of the month shall be considered as one full month. So, the understanding should be that if TDS is deducted on 23^rd April 2017 and payment is made on 8^th May 2017, and interest should be paid for one month.

However, the Income-tax Dept. calculates interest for 2 months because it considers April and May as two separate calendar months. So, the scenario is that even if the TDS is late by 1 day, interest is calculated for 2 months, which seems absurd.

The ITAT in the case of Bank of Baroda v. DCIT [2017] 88 taxmann.com 103 (Ahmedabad – Trib.) also held that interest was to be levied only for the actual period of delay, i.e., from the date on which tax was deducted and till date on which tax was deposited. If such a period exceeds one month, then the full month’s interest is leviable.

N. Recommendations & Expectations Under GST

64. Legislative Amendment in Law Relating to Input Tax Credit (ITC)

Section 17 (5) of the CGST Act lists the items on which input tax credit is not available to a registered person. The most significant challenge stems from the blocked items listed under Section 17(5) of the CGST Act, 2017.

It is recommended that the disallowance of ITC for expenses incurred for business purposes (Section 17(5)) be revisited. The provisions should be aligned with the Income Tax Act to allow ITC for all legitimate business expenditures. Removing artificial restrictions will simplify compliances and support businesses in availing legitimate credits.

65. Yearly Comparison to Be Made of Credit Shown in Form GSTR-2B With Credit in Form GSTR-3B

The current manner of availing the credit and verification is as follows:

• Section 16(2) of the CGST Act prescribes the condition for availment of credit. The major conditions are that the recipient should have received the goods or services and that copies of invoices or other documents evidencing payment of tax are available with the recipient.
• The supplier of goods or services is required to declare the supply in GSTR-1 every month or Form GSTR-1 through IFF quarterly. The information stated in this form, inter-alia, includes the registration number of the recipient.
• The portal prepares a statement of input tax credit for each registered person (recipient) in Form GSTR-2B, which should be availed as credit for that month as per the circular issued by the department.
• In case of a difference in the amount of credit for any month shown in Form GSTR-3B with the amount in Form GSTR-2B, notice is issued to the recipient.
• The recipient does not avail of the credit unless the invoice is accounted for in the books of accounts. This section presumes that the invoice of the supplier is accounted for in the books of account in the same month in which the supplier raises the invoice.  Say the supplier has raised the invoice in the month of Nov-2024 for supplies made in Nov-2024. It is presumed by the above method that the invoice will be accounted for by the recipient in Nov-2024, and he will avail the credit in the same month.
• As per Section 16(4) of the CGST Act, the recipient can avail of the credit of GST by November following the end of the financial year. Thus, credit for the supply of Nov-2024 can be availed latest by 30^th November 2025.  Further, the annual return in Form GSTR-9 and Form GSTR-9C is required to be filed by December following the end of the financial year.  Therefore, monitoring the availment of credit on a monthly basis when the law permits availment in subsequent months is leading to substantial problems and unnecessary issues of letters.

The department should compare the availment of credit on a yearly basis as against a monthly basis.  The format of Form GSTR-9 and Form GSTR-9C shall be suitably amended to provide all the information desired by the department so that the verification in the audit is minimal.

66. Items Listed as Blocked Credits Should Be Revisited

Clauses (a) to (i) of Section 17(5) of the CGST Act list the supply of goods or services for which credit is not available to the registered person. These items are called blocked items. For the purpose of verification, the department has determined the Service Accounting Code (SAC) of these blocked items.  The Form GSTR-2B statement of the registered person is verified with the help of a tool to determine whether any supply of these blocked items appears in Form GSTR-2B.  If yes, the department issues notice to deny the credit on the assumption that the said credit has been availed.

The present practice of issuing notices based on the items appearing in Form 2B is totally erroneous as, in most cases, the credit is not at all availed by the registered person.  The supplier of these blocked items is bound to declare the services in Form GSTR-1, and therefore, these supplies will appear in Form GSTR-2B of the recipient.  Thereby it cannot be presumed that the recipient has taken the credit.

It is suggested that the specific question about non-availment of credit on items specified in Section 17(5) of the GST Act should be certified by the specified authority. If required, invoice-wise details of credit not availed by a registered person shall be annexed with Form GSTR-9 or Form GSTR-9C to avoid unnecessary litigation.

67. ITC Should Not Be Reversed on the Transfer of Exempt Intermediate Products to Distinct Entities That Become Taxable Upon Final Sales

Under the GST law, a person who holds multiple registrations under the same PAN within a single State/UT or across different States/UTs is recognised as a distinct person for each such registration[10]. In other words, two GST-registered persons of the same entity are treated as separate distinct persons in the eyes of the law. The GST law further provides[11] that the supply of goods or services or both between the distinct persons shall be treated as supply when made in the course of furtherance of business.

Due to the said provision, where any goods or services are transferred between these distinct entities, such transactions are considered supply under GST.

The given provision has a significant implication in cases where intermediate products, which are exempt from GST, are transferred to distinct entities. When exempt intermediate products, say agricultural produce, are transferred between distinct entities, the transferor entity is not able to claim input tax credit pertaining to taxable inputs or input services used to manufacture such exempt intermediate goods.

This is due to the restriction provided under Section 17(2) of the CGST Act, 2017, which mandates the apportionment of ITC on goods or services used by a party for effecting taxable and partly exempt supplies.

However, the same intermediate goods can be used by the receiving entity to manufacture the final product, which may be charged to GST. In such cases, even though the final product produced by the company is taxable under GST, the ITC pertaining to inputs or input services procured by the transferor entity is restricted merely because the intermediate product is exempt.

For instance, raw agricultural produce is generally exempt from GST. However, pre-packaged and labelled agricultural produce sold under a brand name is taxable. For producing the final product, raw agricultural produce may be transferred from one unit to another unit by the company, say, for the purpose of labelling or packaging. In such case, the transfer of such raw agricultural produce would be an exempt supply and the ITC related to these exempt supplies cannot be claimed by the transferor unit, despite of the fact that the final product is taxable under GST. Had the entire process been conducted within a single unit, the company would have been eligible to claim full ITC.

The above situation leads to the cascading effect of tax, where ITC is blocked due to the exemption of the transfer between branches under GST, even though the final product is taxable. This restriction leads to added costs for businesses. To mitigate this issue, it is recommended that a specific provision must be introduced to ensure the eligibility of ITC in such scenarios.

68. Yearly Reconciliation of ITC Should Be Introduced in Form GST-9/9C

As per current provisions, the credit of input tax paid on input, input services and capital goods be availed by November following the month of the end of the financial year.  Thus, for the period 2023-2024, the credit can be availed latest by 30^th November 2024. In the present format of Form GSTR-9 and Form GSTR-9C, the year-wise reconciliation is not made.  Very often, the credit for supplies received for the period 2023-2024, credit is availed in the month of May 2024 or June 2024, i.e. in the next financial year, but within the period specified under Section 16(4) of the GST Act, 2017.  Thus, the credit is shown in Form GSTR-3B/Form 9/9C in the Financial Year 2023-2024, whereas it appears in Form GSTR-2B in the Financial Year 2024-2025.  Such mismatch, although permitted in law, has led to a tremendous amount of show cause notices.

The current format of Form GSTR-9 and Form GSTR-9C is highly defective and needs to be substantially modified. To ensure that the ITC is reconciled in the manner desired by the department, a year-wise breakdown of ITC availment and reconciliation shall be made.

It is suggested that the department design an annual ITC format that can be certified by the specified authority, as opposed to the current auto-drafting of the credit in Form GSTR-9 and Form GSTR-9C.

69. Allow Payment of Tax Under Reverse Charge by Utilising the Balance Available in the Credit Ledger

Under the GST law, there are certain provisions, which are resulting in cash blockages without yielding any incremental revenue for the Government. For instance, on the import of services, a recipient of services is liable to discharge GST liability in cash under a reverse charge mechanism, which will then be available to him as ITC. The mandatory payment in cash leads to cash blockage.

The Government should consider allowing taxpayers to use their ITC balance of GST for payment of tax under the reverse charge mechanism. The ability to use ITC balance to discharge the RCM liability would not only address the cash flow issues but also streamline the tax administration process, making it more business-friendly without compromising the tax revenues for the Government.

70. A Thorough Verification of Facts and Returns Should Be Done Before Cancelling the Registration

The department has been carrying out verification of the premises to determine the bogus registration. They have been cancelling the registration retrospectively from inception.  It is presumed that all such transactions taken place prior to cancellation are bogus, and notices are issued to all recipients.

The portal has the facility of “Search Taxpayer Report”.  The department can ascertain that the registered person, before its cancellation, has filed Form GSTR-1 and Form GSTR-3B.  The action to deny the credit shall be taken only when the person has not filed Form GSTR-1 or Form GSTR-3B return.

The presumption that all earlier supplies are bogus is itself incorrect. As long as the tax has been paid, there will be no revenue leakage.

It is recommended that the department verify the details of the Search Taxpayer Report, E-way bill details, etc., before concluding that the credit the recipient availed of is bogus.

71. Legislative Misalignment in Case of ECOs Required to Pay Tax on Supplies Listed Under Section 9(5) as if They Are the Suppliers of Notified Services

The Central Board of Indirect Taxes and Customs (CBIC) has issued Circular No. 240/34/2024-GST, providing much-needed clarification regarding the Input Tax Credit (ITC) availed by E-Commerce Operators (ECOs) in scenarios where services specified under Section 9(5) of the CGST Act, 2017 are supplied through their platform. This circular extends principles previously clarified in Circular No. 167/23/2021, dated December 17, 2021, for restaurant services to other services notified under Section 9(5).

The circular draws upon the principles established in Circular No. 167/23/2021-GST, dated December 17, 2021, which clarified the ITC treatment for restaurant services provided through ECOs. These principles are now explicitly extended to other services notified under Section 9(5).

The circular clarifies and reduces litigation risks for ECOs regarding the ITC claimed on inward supplies. By affirming that ECOs are not required to reverse ITC on inputs and input services used for notified services, the circular addresses a long-standing industry concern.

However, the restriction on utilizing ITC for tax liabilities under Section 9(5) raises concerns about potential misalignment with the legislative framework:

It is to be noted that:

• Section 49(4) of the CGST Act permits the use of the electronic credit ledger balance to pay any “output tax.”
• “Output tax” is defined under Section 2(82) of the CGST Act to exclude tax payable on a reverse charge basis.
• The definition of “reverse charge” under Section 2(98) of the CGST Act is confined to tax payable by the recipient under Sections 9(3) and 9(4) of the CGST Act.
• Section 9(5) of the CGST Act, which governs ECO’s tax liability on notified services, does not explicitly categorise such liability as being under reverse charge.

The tax payable by the ECO is not of the category of reverse charge [which includes transactions covered under Sections 9(3) and 9(4) and not under section 9(5)]. Therefore, there is no legal backing for imposing restrictions on the use of ITC for payment of tax liability and to this extent, the restriction on ITC utilisation for liabilities under Section 9(5) diverges from the legislative intent and framework.

Given the nuanced legal interpretations involved, this aspect may warrant further clarification or reconsideration by the authorities to align with the provisions of the CGST Act.

72. Clarification is Required on the Applicability of GST on Crypto/NFT Transactions

The regulatory treatment of Virtual Digital Assets (‘VDAs’), including crypto-currencies and non-fungible tokens (NFTs), has gained significant attention globally. The Indian Government addressed VDA’s treatment under the Income Tax Act through the Finance Act 2022, but their treatment under the GST remains ambiguous.

A precise classification and taxation guidelines would help businesses understand their tax liabilities and reduce disputes with tax authorities. Coordinating GST treatment of VDAs with global best practices would help Indian businesses remain competitive and align with international standards.

Specific provisions establishing the taxability of VDAs under GST are essential to providing legal clarity, reducing compliance burdens, and aligning India’s tax framework with global best practices. Implementing these changes will enable the Indian Government to effectively regulate and tax VDAs while fostering a conducive environment for businesses involved in the digital asset economy.

73. Revisit the GST Provisions Related to the Online Gaming Industry

Based on the suggestions put forth during the 50th and 51st meetings of the GST Council, a set of amendments were introduced under the GST law to impose 28% GST on the full-face value of bets placed on transactions related to online money gaming, casinos, and horse racing. This is irrespective of whether the game involves ‘skill’ or if it is a game of ‘chance’. These amendments were made effective from October 1, 2023.

Additionally, the Government contended that these amendments were ‘clarificatory’ in nature. Therefore, the tax was always payable at full face value and not just on the platform fee. Consequently, the gaming companies were served with notices for prior years, which are now pending before various Courts for disposal. This development has impacted not only the gaming companies but also resonates with millions of gamers across the country, potentially reshaping the digital entertainment landscape.

As a result, the Gaming Industry and a few State Governments challenged these amendments. Consequently, the GST Council agreed to review the implementation of these provisions after six months of their effectiveness. However, due to the Lok Sabha Elections 2024, the GST Council has postponed the review of these provisions, and it is expected that the issue will be reviewed in the upcoming budget.

The new tax structure has been a huge burden for the Indian Gaming Industry. This is because, under the new tax structure, GST is payable only at the time of deposit and every time a player makes a deposit on an online gaming platform, 28% GST is payable on the face value. Thus, if the user’s behaviour is such that they keep money for long on an online gaming platform, the company gets more revenue for the tax paid. This has led them to explore various models that discourage users from frequently withdrawing their money.

On the other hand, offshore illegal betting and gambling have been on the rise. The All India Gaming Federation has submitted that the offshore illegal betting and gambling platforms are collecting deposits worth $12 Billion in a year, which implies a loss of at least $2.5 Billion in GST revenues to the Government. This occurs despite the specific legal provision under the law that requires offshore online gaming platforms to pay IGST in respect to supplies made by such entities to a person in the taxable territory. Furthermore, where such IGST has not been paid, the websites of such platforms are liable to be blocked.

Considering the operational challenges and significant financial implications faced by the Indian gaming industry and the rise of offshore illegal betting and gambling activities, the provisions that have been implemented need to be reassessed immediately. The Government needs to re-examine the gaming industry’s taxation models and align its taxation landscape with those prevalent globally, which largely work on the Gross Gaming Revenue (GGR) model. This alignment will help provide a level playing field for gaming platforms in India, fostering innovation and employment generation.

74. Need Clarity on the Treatment of Post-Sales Discounts and Incentives

The ambiguity around post-sales discounts and incentives has been there since the inception of the GST law. Section 15(3)(b) of the CGST Act, 2017 allows for the exclusion of post-sales discounts from the taxable value, provided certain conditions are met. These conditions include:

• The discount is agreed upon before or at the time of supply.
• The discount is linked to a specific invoice.
• The recipient of the supply reversing the input tax credit (ITC) attributable to the discount.

Thus, if any of the above conditions are not met, the GST law does not allow discounts to be deducted from the value of supply. The basic issue revolves around whether secondary or post-sales discounts can be deducted from the value of supply. There have been conflicting interpretations of these provisions. Some rulings consider post-sales discounts a reduction in the original supply value, excluding them from GST, whereas others do not allow any deduction.

However, the debate does not end here. The CBIC had earlier clarified by way of circular[12] that such an additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by the dealer to the customer. This additional discount would be liable to be added to the consideration payable by the customer for the purpose of arriving at the value of the supply made by the dealer. However, in view of the industry apprehensions, the given clarification was later withdrawn[13] by the CBIC. However, the GST authorities are still following the given view and treating such additional discounts as a form of ‘consideration’ for a separate supply, attracting GST. In some cases, the authorities treat volume/additional discounts as subsidies and add them to the value of supply in terms of Section 15(2)(e) of the CGST Act, 2017. This lack of consistency creates a challenging environment for businesses.

To address this confusion, the Government needs to make necessary amendments or issue clear guidelines on how to treat various types of post-sales discounts and incentives across different industries.

75. Introduce an Enabling Provision to Split Up a Composite Supply

Health care services provided by a clinical establishment, an authorised medical practitioner, or paramedics are exempted[14] from GST. However, with effect from July 18, 2022[15], the exemption is not available to services provided by the clinical establishment by way of providing a room (other than ICU/CCU/ICCU/NICU) with room charges exceeding Rs. 5,000 per day to a person receiving the health care services.

The GST law provides the concept of composite supply wherein the goods and services supplied in a bundle are taxed together. In such cases, the provisions that apply to the principal supply apply to all other supplies in such bundle. Notably, the room rent charged in the course of providing healthcare services to in-patients for diagnosis or treatment is considered a part of the naturally bundled supply of healthcare services. However, by separately charging GST where room rent charges exceed Rs. 5,000 per day, the Government has artificially split up the components of the composite supply.

Notably, the issue of artificial splitting of composite supply was also brought before the Supreme Court. In dealing with the validity of GST payable under reverse charge on ocean freight for the import of goods under CIF terms, the Supreme Court held[16] that the definition of the composite supply does not empower the legislature to artificially split its components. Under the CIF, charging GST on ocean freight would amount to levying tax separately on the freight component, which is not permitted as per the provisions of composite supply. In view of this, the Supreme Court held that the reverse charge on ocean freight is ultra vires as it violates the principle of ‘composite supply’.

If the above principle is applied to the supply of health care services, the component of room rent cannot be separated from it, even if it exceeds Rs. 5,000. Thus, the exemption would be available for the whole supply of health care services, including the component of room rent.

The relevant exemption entry should be revisited to do away with the GST levy on the room rent, as the law does not allow splitting up the composite supply. However, where the Government intends to provide a separate tax treatment to a component of composite supply, then such splitting of the composite supply should be backed by the GST law, which would require necessary amendments in the definition of ‘composite supply’.

76. Introduce a Single Central GST Account at the National Level for Companies Having Multi-State Operations

Under the current GST framework, businesses must maintain separate state-level balances for the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST). This system requires businesses operating in multiple states to manage separate CGST balances, which is cumbersome and often leads to inefficient use of credits and cash flows.

The likely benefits that would accrue to the government with such a move are mentioned below:

• Reduced Operational Costs: The government would save on operational costs associated with managing multiple state-level CGST balances and streamline credit management.
• Improved Revenue Management: A centralised system would give the government better oversight of national-level CGST credits, enabling more accurate revenue projections and collections.
• Simplified Tax Administration: Centralizing CGST balances would simplify tax administration, allowing the government to reduce administrative complexities and improve efficiency.

It is recommended that a national-level CGST balance be created to allow businesses to offset liabilities across states, leading to better use of available credits and cash. Consolidating CGST balances would reduce the complexity of financial management, making compliance easier and less expensive for businesses. National-level CGST balances would also streamline tax management, allowing businesses to focus on core activities rather than managing disparate tax credits.

77. Allow Small-scale Ice Cream Manufacturers to Opt for a Composition Scheme

The GST law allows certain taxpayers with turnover up to Rs. 1.5 Crores to opt for a composition scheme, which enables them to pay GST at lower rates and comply with fewer compliance requirements. However, this scheme is not available to all taxpayers as the law provides a specific restriction for a list of persons who cannot opt to pay tax under the composition scheme. This list includes manufacturers of Pan Masala, Tobacco, Ice Cream, and other edible items. This restriction was introduced based on the recommendation of the 17th GST Council meeting.

Small-scale ice cream manufacturers have criticised this restriction, arguing that ice cream has been placed on par with Pan Masala and Tobacco without adequate justification. They contend that ice cream is a widely consumed item and should not be arbitrarily classified as sin goods without proper reasoning.

Recently, this issue came before the Chhattisgarh High Court, wherein the Hon’ble Court directed[17] of the GST Council to reconsider the exclusion of small-scale ice cream manufacturers from the composition scheme. The Court highlighted that the GST Council had provided no specific reason to exclude Ice Cream Manufacturers from the benefit of the composition scheme, and it should have considered the socio-economic impact of placing ice cream in the 18% tax rate. A similar order was earlier passed by Delhi High Court[18] on the same matter.

It is recommended that provisions relating to the composition scheme should be suitably amended to allow its benefit to Ice Cream manufacturers.

78. Include Petroleum Products, ATF, and Natural Gas Under GST

The GST Council’s 45th meeting, held on September 17, 2021, discussed including petroleum products in the GST framework. Although the Council deferred the decision, there is growing consensus on gradually bringing petroleum products under GST. Aviation Turbine Fuel (‘ATF’) and Natural Gas stand out as potential candidates for phased inclusion due to their distinct characteristics. The inclusion of ATF and natural gas under GST can significantly benefit both sectors and pave the way for the broader inclusion of other petroleum products. A well-planned, phased approach will ensure a simplified, uniform tax structure aligned with global best practices.

79. Rationalise GST Rates

The GST structure in India currently includes multiple tax slabs of 0%, 5%, 12%, 18%, and 28%, with certain products also attracting a compensation cess over and above the GST rate. Over the years, there has been consistent dialogue about simplifying this structure, primarily by reducing the number of tax rates. One proposed reform is to merge the 12% and 18% slabs into a single, moderate rate. The multiple GST rates add layers of complexity to the tax system, creating compliance challenges for businesses, especially for MSMEs. With varying rates for different products and services, businesses face challenges in determining the correct tax slab for their offerings, leading to disputes and litigations. Consolidating GST rates, especially the proposed merger of the 12% and 18% slabs into a single GST rate, can significantly simplify India’s tax system.

80. Substitute Phrase ‘Plant or Machinery’ With ‘Plant and Machinery’ in Section 17(5)(d) of the CGST Act

The GST Council had recommended amending Section 17(5)(d) of the CGST Act to replace the phrase ‘plant or machinery’ with ‘plant and machinery’, retrospectively, with effect from 01-07-2017 (i.e. since inception of GST), so that the said phrase may be interpreted as per the Explanation at the end of Section 17 of CGST Act.

According to the GST Council, this was a drafting error, and the amendment was necessary to align the provisions of Section 17(5)(d) of the CGST Act with the legislature’s intent.

This topic has been highly debated due to its significant impact on the availability of input tax credit (‘ITC’), which was previously deemed ineligible, particularly for industries like construction and real estate.

It is to be noted that this amendment is likely to nullify the impact of the Supreme Court decision as held in Safari Retreats[19].

The issue in Safari matter was whether the phrase ‘plant or machinery’ in Section 17(5)(d) can be given the same meaning as the explanation appended at the end of Section 17(5), which defines the term ‘plant and machinery’.

After much deliberation, it was held by the Hon’ble Supreme Court that ‘plant or machinery’ cannot be given the same meaning as provided for ‘plant and machinery’. Also, it was observed that ITC could be availed on goods and services used for the construction of immovable property subject to its use, which was to be decided on a case-by-case basis by applying a functionality test, considering the unique business requirements and the role that immovable property plays in the said business.

Now, through the recommendation of the 55th GST Council meeting, it is expected that the upcoming budget will amend the phrase ‘plant or machinery’ with ‘plant and machinery’, retrospectively, with effect from 01-07-2017, which reinforces the department view and upholding the understanding that ITC should not be available on exceptions carved out by the explanation appended at the end of Section 17(5) which defines the term ‘plant and machinery’.

81. Supply of Goods Warehoused in SEZ or FTWZ to Any Person Before Clearance for Exports or to DTA Should Be Included in Schedule III of CGST Act, 2017

The upcoming budget is expected to bring suitable changes to include the supply of goods warehoused in a Special Economic Zone (SEZ) or Free Trade Warehousing Zone (FTWZ) to any person before clearance of such goods for exports or before clearance of such goods to the Domestic Tariff Area (DTA) in Schedule III of the CGST Act, 2017. This change would treat these goods neither as a supply of goods nor as a supply of services. This change is pursuant to the recommendation of the 55^th GST Council meeting.

The insertion of this clause into Schedule III of the CGST Act 2017 is a welcome change. It offers legal certainty and eases the operational burden for businesses operating in SEZs and FTWZs. This aligns with the broader policy objective of promoting exports and economic activity in these zones without any tax complications.

82. Transaction of Vouchers to be Treated as Neither Supply of Goods Nor of Services

Under GST law, voucher means^[20] an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identity of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument.

In case of a supply of vouchers by a supplier, the time of supply shall^[21] be – (a) the date of issue of the voucher if the supply is identifiable at that point; or (b) the date of redemption of voucher, in all other cases. Further, rule 32(6) deals with the determination of the value of the supply of the voucher.

The taxability of vouchers has been a longstanding point of contention since the inception of the GST law with conflicting perspectives from various Advance rulings and courts causing confusion amongst stakeholders.

Earlier, the Karnataka High Court, in Premier Sale Promotion Private Limited^[22], held that vouchers, being pre-paid payment instruments (‘PPIs’), are neither goods nor services and hence outside the levy of GST. This High Court decision has provided further clarity by holding that gift vouchers, being actionable claims, are deemed neither the supply of goods nor the supply of services.

The Karnataka AAAR followed this view in the case of Myntra Designs (P.) Ltd. The Tamil Nadu AAAR, in the case of Kalyan Jewellers India Ltd., held^[23] that PPI is neither goods nor services.

To resolve the ambiguity and minimise the litigations, based on the recommendation of the 55th GST Council meeting, it is expected to omit Section 12(4) and Section 13(4) from the CGST Act and Rule 32(6) from CGST Rules in the upcoming budget, considering transactions in vouchers shall be treated as neither supply of goods nor supply of services. Further, vide Circular No. 243/37/2024- GST, Dated 31-12-2024, the CBIC has clarified that transactions in vouchers are neither to be treated as a supply of goods nor as the supply of services.

83. Amendment to Be Made in the Definition of Local Authority

The term ‘local authority’ is defined under Section 2(69) of the CGST Act and includes a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to or entrusted by the Central or State Government with the control or management of a municipal or local fund.

The definition of local authority uses the terms ‘municipal funds’ or ‘local funds’ as a key criterion for qualifying as a local authority. However, these terms are not explicitly defined under the CGST Act. The absence of a definition of these terms has created interpretational challenges in determining whether funds managed by authorities like Zilla Parishads or District Boards qualify as municipal or local funds.

The Supreme Court, in R.C. Jain & Ors, held^[24] that it is not appropriate to borrow definitions of terms like ‘local fund’ or ‘municipal fund’ from other statutes, such as the General Clauses Act or state-specific treasury rules. The Court emphasised that the meaning of terms used in one law cannot be automatically imported into another.

In the case of Newtown Kolkata Development Authority, the West Bengal AAR^[25] inconsistently referenced external statutes like the West Bengal Treasury Rules, which was not in accordance with the principles propounded by the Supreme Court of India.

To address these issues, based on the 55th GST Council it is expected that suitable amendments be made to clause (c) of Section 2(69) of the CGST Act to define the terms ‘local fund’ and ‘municipal fund within the GST framework.

84. Clarity is Sought on the Taxability of EV Charging Stations

The applicability of GST on supplies made by EV charging stations has sparked disputes, raising questions about classification, tax rates, and treatment under existing regulations.

A key area of ambiguity is whether the supply by EV charging stations should be classified as a supply of goods or services under GST regulations. This distinction significantly impacts the tax treatment of such transactions.

Further complexities arise concerning whether the supply should be considered as the provision of electricity, which is exempt from GST, or as a taxable supply categorised under HSN 8504 (Charger or charging station for Electrically operated vehicles), attracting a GST rate of 5%. This lack of clarity has led to inconsistencies in tax compliance and interpretation.

Another notable disparity in this scenario is that consumers charging EVs at personal residences are not subject to GST, while those using commercial EV charging stations incur GST. This creates a serious inconsistency in the tax treatment of what is essentially the same transaction. It also results in a dual tax structure for the same end use, placing an undue financial burden on consumers utilizing commercial facilities.

Additionally, the European Court of Justice, in the case of Digital Charging Solutions[26], has addressed a similar issue & ruled that electricity supplied for charging electric vehicles is to be classified as a supply of (‘electricity’) goods since electricity is considered tangible property. This perspective could serve as a reference point for aligning GST policies in India.

It is therefore recommended that the supply by EV charging stations be explicitly clarified as the supply of electricity (in line with the global tax treatment), exempt from GST. This will promote and accelerate the growth of the electric vehicle industry and infrastructure in India.

85. Clarity is Required on the Place of Supply of Intermediary Services

The taxability of intermediary services has been a subject of significant debate, particularly regarding whether GST should be charged on an interstate or intrastate basis.

Section 13(8)(b) of the IGST Act specifies that the place of supply for intermediary services is the location of the service supplier.

The Bombay High Court[27] emphasised the report of the Department-related Parliamentary Standing Committee on Commerce and provided such services would qualify as interstate supplies, subject to IGST.

In contrast, the Gujarat High Court[28], ruled that intermediary services constitute intrastate supplies thereby attracting CGST and SGST.

Currently, the ground-level authorities are challenging the levy of CGST and SGST by virtue of section 13(8)(b) of the IGST Act, 2017, where the service providers have levied IGST. Conversely, the ground-level authorities are insisting on a levy of IGST on the supply of intermediary services to foreign recipients where CGST and SGST have been paid.

Section 13 of the IGST Act, 2017, should be amended to delete the reference to intermediary services, which are consequently covered under the default rule. It is also recommended that an amendment in law be introduced to provide for the automatic set-off of liability paid under the wrong head instead of the payment of tax under the correct head and the refund of the tax paid under the wrong head (as envisaged under section 77 of the CGST Act, 2017, and section 19 of the IGST Act, 2017, respectively).

86. Inter-state RCM Transactions Should Be Covered Under the ISD Mechanism

Under GST, a supplier of goods and services may receive a single invoice at common office(s) for the procurement of services that are used by its other units. Since these services are common to multiple units, the common office(s) cannot claim ITC of the entire GST amount. To address this, the common office is required to register as an ISD under GST and distribute the ITC to the relevant units by issuing invoices in compliance with the GST legislation.

Notably, effective 01-04-2025^[29], ISD registration is mandatory for common offices receiving common ITC for deemed distinct persons. The Finance Act, 2024, has substituted the definition of ISD under Section 2(6) and Section 20 of the CGST Act to include the distribution of common ITC in respect of invoices of intra-state RCM services.

To further extend the benefit of availment of common ITC on inter-state RCM transactions under the ISD mechanism, based on the recommendation of the 55th GST Council meeting, it is expected to amend Section 2(61) and Section 20(1) of the CGST Act by including reference to supplies subject to tax under section 5(3) and 5(4) of IGST Act in the said provisions. It is further expected that Section 20(2) of the CGST Act and Rule 39(1A) of the CGST Rules be suitably amended to be made effective from 01-04-2025.

87. Formula to Calculate Refund in Cases the Export (Under CIF Contract) is Made Without Payment of Tax Needs Rationalisation

Section 54(3) of the CGST Act, 2017 provides for the refund of the balance of ITC where export is made without payment of tax under bond or letter of undertaking. Rule 89(4) of the CGST Rules, 2017 provides the refund formula for the same as under:

Refund amount = [(Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services)/Adjusted total turnover] * Net ITC

In the given formula, regarding the turnover of the zero-rated supply of goods, the Explanation to Rule 89(4) of the CGST Rules[30] provides that the value of goods exported out of India would be taken as lower of the following values:

• Free on Board (FOB) value declared in the Shipping Bill or Bill of Export form, as the case may be; or
• The value is declared in the tax invoice or bill of supply.

Notably, for the export of goods under CIF contracts, the exporter has to separately report the FOB value of goods, insurance and freight expenses in the shipping bill. The FOB value reported in the shipping bill would always be less than the value as per the tax invoice. The GSTN system, in this case, picks the FOB value as per the shipping bill. Thus, the refund amount would always be reduced proportionately to the value of insurance and freight expenses.

This would result in a loss of the refund amount pertaining to the value of insurance and freight. This loss would be significant in cases where the cost of packing and transporting comprises a considerable proportion of the value. The formula for calculating the refund of ITC should be rationalised, and in the case of CIF contracts, the CIF value of the goods should be considered.

88. Need Clarification on Whether Interest is Computed on Gross or Net Tax Amount After Utilising ITC

Under GST laws, interest is typically calculated on the amount of tax payable for the period of delay in filing the periodical return. According to Section 50 of the CGST Act, 2017, if a registered person fails to pay tax by the due date, it shall be liable to pay interest at a prescribed rate of 18 percent.

There was uncertainty about whether interest should be calculated on the total tax owed (i.e., the gross amount of tax payable) or just the net amount after adjusting available input tax credits in the electronic credit ledger for that period.

To address this, the GST Council, during its 31st meeting, recommended that interest be due only on a net basis (i.e., on tax paid in cash through the electronic cash ledger).

In this regard, relevant amendments were retrospectively notified from the inception of GST in order to prevent potential legal issues.

However, a recent ruling by Patna High Court[31] has resurfaced this issue and held that interest charges automatically apply to delayed return filings, regardless of whether payments are made through the Electronic Credit or Cash Ledger. The Court observed that the input tax credit and the resultant payment of tax from the Electronic Credit Ledger occurs only when a return is furnished. If there is a delay in furnishing of returns, then there is a delay in the input tax credit coming into the Electronic Credit Ledger and a resultant payment being made to the Government as tax is belated, leading to a levy of interest.

From the above, it can be inferred that this matter will take another round of litigation to settle. It is relevant to mention here that the CBIC vide Circular F. No. CBEC-20/01/08/2019-GST, dated 18-09-2020, has clarified that for the period 01-07-2017 to 31-08-2020, field formations in respective jurisdictions may be instructed to recover interest only on net cash tax liability (i.e. that portion of the tax that has been paid by debiting the electronic cash ledger or is payable through cash ledger) and wherever SCNs have been issued on gross tax payable, the same may be kept in Call Book till the retrospective amendment in section 50 of the CGST Act, 2017 is carried out. Despite the circular, which is binding on the department, it has been overlooked, leading to widespread litigations on a Pan India basis. Additionally, conflicting decisions have been issued by different High Courts on this issue.

It is recommended that the Government amend the provision and issue detailed guidelines in the upcoming budget to resolve these ongoing disputes.

89. Pre-deposit for Filing of Penalty Appeals in Respect of Section 129 of CGST Act Should be Reduced

Under the GST law, the first appeal is filed against an order passed by the Adjudicating Authority before the Appellate Authority. If the aggrieved party is not satisfied with the order of the Appellate Authority, a second appeal can be filed before the Appellate Tribunal.

However, the taxpayer is required to mandatorily deposit a certain amount as pre-deposit before the Appellate Authority and Appellate Tribunal as a condition for admission of appeal. Notably, for all matters (other than matters relating to Section 129) no pre-deposit is required for filing appeals for penalty amount since the amount of pre-deposit is tagged to the amount of tax in dispute. However, the proviso to Section 107 (6) of the CGST Act specifies that a penalty of 25% is to be pre-deposited for filing an appeal against the order of Section 129.

Based on the recommendation of the 55th GST Council meeting, the upcoming budget is expected to amend the proviso to Section 107(6) of the CGST Act to provide for the payment of a pre-deposit at 10% instead of 25% for filing appeals before the Appellate Authority in cases involving only a penalty demand without affecting the tax demand.

Further, in the upcoming budget, it is expected that a proviso will be inserted into Section 112(8) of the CGST Act to provide for payment of pre-deposit at 10% for filing appeals before Appellate Tribunal in cases involving only demand of penalty without involving the demand of tax.

90. Powers to Arrest Should Be Exercised After Due Approvals

Section 69 of the Central Goods and Services Tax (CGST) Act, 2017, empowers authorised GST officers to arrest individuals for certain offences under the GST law. This provision is designed to prevent tax evasion and ensure compliance with the law.

The power to arrest relies solely on the Commissioner’s “reason to believe” that an offence under clauses (a) to (d) of Section 132(1) has been committed. The ability to arrest based on “reason to believe” without stringent procedural checks opens the door to potential abuse and arbitrary detention.

It is recommended that GST provisions be amended to seek specific approval from the Principal Chief Commissioner before arrests can be made. Further, the proper officers seeking approval must present written evidence justifying the arrest.

Recently, the Hon’ble Supreme Court has expressed concerns over the ambiguity in the provisions of section 69. The Supreme Court instructed the Centre to refrain from employing “threat and coercion” tactics during search and seizure operations to recover GST from traders. It emphasised its commitment to interpreting the law in a manner that upholds individual liberties and prevents undue harassment of citizens. Thus, such changes, once implemented, will address the concerns raised by the Hon’ble Supreme Court regarding the potential misuse of Section 69.

These changes will emphasise safeguarding individual liberties and preventing undue harassment.

91. Offences Should be Mentioned Explicitly

Section 132 of the CGST Act prescribes punishments for specified offences. However, certain clauses within this section raise concerns due to their broad and generic nature, which could potentially lead to misuse and harassment.

Relevant text of the provision:

***

(h) acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with, any goods which he knows or has reasons to believe are liable to confiscation under this Act or the rules made thereunder;

(i) receives or is in any way concerned with the supply of, or in any other manner deals with any supply of services which he knows or has reasons to believe are in contravention of any provisions of this Act or the rules made thereunder;

(l) attempts to commit, or abets the commission of any of the offences mentioned in [clauses (a) to (f) and clauses (h) and (i)] of this section,

***

These clauses are overly broad and generic in nature. They do not require evidence of intentional tax evasion by the defaulter.

The GST provisions should be amended by way of removing these provisions entirely from Section 132(1) to prevent its misuse is recommended. The GST provisions should be amended to replace criminal liability for non-compliance with a token penalty, ensuring fairness in enforcement.

92. Malicious Intent Should Be the Basis for Levying Penalty

The relevant text of Clause (c) of Section 132(1):

(c) Avails input tax credit using the invoice or bill referred to in clause (b) or….

This provision penalises individuals availing input tax credit under circumstances outlined in clause (b) of Section 132(1). It does not consider whether the individual acted with malicious intent (mens rea).

It is recommended that this clause be modified to adhere to the legal maxim “actus non facit reum nisi mens sit rea,” which means that an act is not guilty unless the mind is guilty. Either the first part of clause (c) should be deleted entirely or the term ‘fraudulently’ should be inserted at the beginning of clause (c) to limit its scope to deliberate offences. For unintentional non-compliance, impose a token penalty instead of criminal liability.

93. Criminal Proceedings for Self-rectified Defaults

Criminal proceedings under Section 132(1) can be initiated even when the defaulter has voluntarily identified the default and corrected it before the proceedings are initiated.

It is recommended that criminal action be restricted to cases where defaults persist when proceedings are initiated. In cases of self-rectification of defaults, the law can prescribe to levy a token penalty for non-compliance instead of initiating criminal proceedings. This approach encourages proactive adherence to tax laws.

O. Recommendations & Expectations Around Customs Laws

94. The Current AEO Scheme Should Be Improved

Authorised Economic Operator (AEO) status, particularly at Tier 2 and Tier 3 levels, is part of a global initiative to facilitate trade by recognising businesses with robust security practices and a strong compliance track record. To further enhance the benefits for these high-tier AEO holders and encourage compliance, the government could consider offering additional privileges, such as:

Extended Duty Deferment

• Current Scenario – AEO-Tier 2 and 3 holders currently enjoy a 15-day duty deferment period.
• Proposed Change – Extending this period to 30 days would significantly benefit these businesses, providing them with better cash flow management and operational flexibility.

Reduced Pre-Deposit Requirements

• Current Scenario – Under the general law, a pre-deposit of 7.5% to 10% is required for appeals against duty demands.
• Proposed Change – Lowering the pre-deposit requirement for AEO-Tier 2 and 3 holders would ease the financial burden on these compliant entities, encouraging them to maintain high standards.

95. AEO Certification for Merged Entities With Tier 2 Status Should be Simplified

As per Customs Circular No. 33/2016, under Para 5.3.4, an Authorized Economic Operator (AEO) status holder must reapply for AEO certification if there is a change in the legal entity due to mergers or acquisitions.

Challenges

• Increased Compliance Burden – Mergers and acquisitions are common in the evolving corporate landscape. Reapplying for AEO certification adds unnecessary administrative overhead.
• Disruption in Business Operations – The reapplication process could delay access to AEO benefits, impacting business continuity.

In cases where both merging entities already hold AEO Tier 2 certification, the status should automatically transfer to the new entity upon intimation to the authorities. The merged entity should notify the Customs department of the corporate restructuring. Based on the intimation, the AEO Tier 2 status should be seamlessly continued for the new legal entity without requiring a fresh application. Implementing this recommendation would encourage corporate restructuring while maintaining the integrity of the AEO program, fostering a more business-friendly environment.

96. Process With Respect to Customs Exemptions Should Be Rationalised

The government has been working to reduce the number of exemption notifications under the Customs Act, aiming to streamline the tax system and enhance transparency. In the interim Budget of 2024, the government extended the validity of 146 exemptions to September 30, 2024. However, these exemptions apply to critical sectors like Electric Vehicles, Chemicals, and Medical Devices. Given their importance, the Government should consider extending the sunset dates on certain exemptions beyond September 2024, particularly for these critical sectors, to support the Make in India initiative.

Reasons to Extend Sunset Dates

• Support for Make in India – Longer exemptions would encourage domestic manufacturing, aligning with the government’s vision to make India a global manufacturing hub.
• Economic Stability – Critical sectors need stability in policy to plan investments, ensuring continued growth and innovation.
• Global Competitiveness – Exemptions help domestic producers remain competitive, particularly in sectors where global competition is intense.

97. BCD Exemption to Be Given to OEM for Vehicles for R&D, Which is Currently Limited to Testing Agencies

Vehicles imported for R&D and testing are required to comply with the Central Motor Vehicle Rules (CMVR) and undergo testing at notified agencies such as ICAT and ARAI. At present, Basic Customs Duty (BCD) exemptions for R&D purposes are restricted to these testing agencies.

Gap Identified

Original Equipment Manufacturers (OEMs) also engage extensively in R&D and testing activities to innovate and enhance automotive technologies. However, they do not currently benefit from the BCD exemption, which limits their ability to conduct cost-effective R&D.

It is recommended to extend the BCD exemption currently provided to vehicles, automobile parts, sub-systems, and tyres imported by notified testing agencies for testing and certification to include OEMs, subject to specified conditions to ensure the exemption is used exclusively for genuine R&D and testing purposes. Such a policy change would align with the Government’s focus on fostering innovation and strengthening the Indian automotive industry’s global standing.

98. Clarity is Required on the Definition of Beneficial Owner Under Customs

Section 2(3A) of the Customs Act, 1962 provides the concept of the beneficial owner, which was inserted with the Finance Act, 2017, including amendments in the importer and exporter definition. However, no clarity has been given on its operation or interpretation vis- à-vis import or export. Given the manner in which the term beneficial owner is defined, it could lead to interpretation issues, including potential disputes in cases of duty demand/ assessment, alleged evasion, non-compliance, etc.

It is recommended that suitable guidance or clarification be provided for collective interpretation of the definition with that of an importer or exporter and instances where this could be relevant.

99. Introduction of an Incentive Scheme for Services Exports

The Government has withdrawn the Services Exports from India Scheme (SEIS), leaving Indian service exporters without an alternative support mechanism. This gap comes at a critical time as service exports face vulnerabilities amid global economic challenges.

Key Challenges

• Reduced IT Services Hiring – Since 2022–23, Indian IT services companies have slowed hiring, reflecting global market uncertainty.
• Global Slowdown Risks – The potential US economic slowdown and Eurozone recession impact service exports.
• Growing Competition – Emerging export destinations such as Vietnam, Brazil, and the Philippines are increasing global competition.

It is recommended to introduce a scheme for services akin to Production-Linked Incentive (PLI) Schemes for manufacturing can bring balance. The Government should consider bringing specific schemes for critical sectors like Research & Development and business support services, which are rapidly growing yet underrepresented compared to IT services.

This policy shift would help sustain and grow India’s service exports, contributing significantly to the country’s economic stability.

100. Validity of Advance Ruling under Customs

As per Section 28J(2) of the Customs Act, 1962, an Advance Ruling remains valid for three years, unless there is a change in law or facts that formed the basis of its pronouncement.

Gaps Identified

There is no explicit clarification or mechanism provided for situations where:

• The validity period of three years has expired.
• There is no change in law or facts during this period.
• The applicant wishes to extend the ruling for continued applicability.

It is recommended to remove the validity period of 3 years altogether. This will help businesses to continue their operations with ease and existing position of law when there is no change in law or business facts. Such clarity would provide certainty to businesses and applicants, ensuring smoother compliance with customs regulations and minimising disputes or operational disruptions.

101. Proposal for a Comprehensive Tax Amnesty Scheme under Customs

In the Union Budget 2019, the Government introduced the Legacy Dispute Resolution Scheme to resolve pending disputes under Central Indirect Tax laws. The initiative saw tremendous success, with wide acceptance from the industry.

Need for a Customs Tax Amnesty Scheme

A significant number of disputes remain pending under customs laws, creating a burden on both taxpayers and the judicial system.

It is recommended that a scheme similar to Sabka Vishwas Legacy Dispute Resolution Scheme (SVLDRS), 2019, for pre-GST indirect taxes or Vivad Se Vishwas (VSV) for income tax disputes be designed. The Government may consider offering taxpayers the opportunity to settle customs disputes by completely waiving interest and penalties. Introducing such a scheme would align with the Government’s broader goals of simplifying tax administration, reducing litigation, and promoting ease of doing business.

Disclaimer

• This document is solely for the information and may not be used for any other purpose or distributed to any other party without our prior written consent.
• Our comments are based on the existing laws and the judicial interpretation prevailing in India. We have no responsibility to update this document for events or circumstances occurring subsequently.
• The comments in this memorandum are purely a matter of legal interpretation and are not binding upon anyone. The Govt. and judicial authorities may always take a different view.
• We have provided our comments on the provisions of the Income Tax Act, 1961, Goods & Services Tax (GST) and the Rules thereunder. We have not analysed the provisions of other legislation.
• The document is prepared by identifying the asymmetry and conflict between different provisions that should be plugged to bring clarity in the law.
• We have also taken reference to international best practices to suggest some changes in the law.

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[1] Chamber of Tax Consultants vs. Director General of Income-tax (System) [2024] 169 taxmann.com 506 (Bombay)

[2] Circular No. 21/2024, dated 31-12-2024

[3] Circular No. 12/2022, dated 16-6-2022

[4] Circular No. 12/2022, dated 16-6-2022

[5]https://dst.gov.in/sites/default/files/R%26D%20Statistics%20at%20a%20Glance%2C%202022-23.pdf

[6] Sunil Miglani v. DCIT [2020] 115 taxmann.com 91 (Delhi – Trib.)

[7] Rupesh Rashmikant Shah v. Union of India (2019) 108 taxmann.com 181 / 417 ITR 169 (Bom); CIT v. Oriental Insurance Co. Ltd (2012) 27 taxmann.com 28(All); Oriental Insurance Co. Ltd v. Chief CIT (2022) 138 taxmann.com 88 / 445 ITR 300 (Guj)].

[8] Madhupuri Corporation vs. Prabhat Jha, Deputy Director of Income-tax [2002] 125 Taxman 309 (Gujarat)

[9] Abbasbhai A. Upletawala v. ITO [2022] 143 taxmann.com 384 (Mumbai – Trib.)

[10] Section 25(4) of the CGST Act

[11] Section 7(1)(c) of the CGST Act read with Schedule I

[12] Circular No. 105/24/2019-GST, Dated 28-06-2019

[13] Circular No. 112/31/2019-GST, Dated 03-10-2019

[14] Sl. No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28-6-2017

[15] Based on the recommendations of 47th GST Council Meeting

[16] Union of India Vs. Mohit Minerals (P) Ltd. [2022] 138 taxmann.com 331 (SC)

[17] Small Scale Ice Cream Manufacturer Association vs Union of India [2024] 161 taxmann.com 297 (Chhattisgarh)

[18] Del Small Ice Cream Manufacturers Welfare’s Association vs Union of India [2021] 126 taxmann.com 60 (Delhi)

[19] Chief Commissioner of Central Goods and Service Tax vs.  Safari Retreats (P.)  Ltd. [2024] 167 taxmann.com 73 (SC)

[20] Section 2(118) of the CGST Act

[21] Section 12(4) of the CGST Act and Section 13(4) of the CGST Act

[22] Premier Sales Promotion (P.) Ltd. v. Union of India [2023] 147 taxmann.com 85 (Karnataka)

[23] Kalyan Jewellers India Ltd., In re [2021] 127 taxmann.com 37 (AAAR – Tamil Nadu)

[24] Union Of India & Ors vs R. C. Jain & Ors [1981 AIR  951}

[25] [2020] 115 taxmann.com 126 (AAR-WEST BENGAL)

[26]https://curia.europa.eu/juris/document/document.jsf?text=&docid=291245&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=14257487

[27] Dharmendra M. Jani vs. Union of India [2023] 149 taxmann.com 317 (Bombay)/[2023] 72 GSTL 448 (Bombay)/[2023] 97 GST 630 (Bombay)[18-04-2023]

[28] Material Recycling Association of India vs. Union of India [2020] 118 taxmann.com 75 (Gujarat)/[2020] 81 GST 164 (Gujarat)/[2020] 40 GSTL 289 (Gujarat)[24-07-2020]

[29] Section 20(1) of the CGST Act read with Section 2(61) of the CGST Act

[30] Inserted vide Notification No. 14/2022–Central Tax, Dated 05-07-2022 w.e.f. 05-07-2022

[31] Sincon Infrastructure (P.) Ltd. v. Union of India [2024] 161 taxmann.com 616