Union Budget 2024-25 | Taxmann’s Key Expectations & Recommendations

Taxmann's Advisory and Research has provided key expectations for the Union Budget 2024-25, including weighted deductions for R&D under the 2047 Vision of Viksit Bharat. For business income, recommendations include FMV determination for section 28(iv), amendments for disallowances to MSEs, concessional tax regimes for firms/LLPs, non-taxable conversion of gold stock-in-trade to EGR, taxability of dividends as business income, and exempting stock-in-trade share transfers in amalgamations. Additionally, no section 44AD benefit for speculative business, a single advance tax payment under section 44AE, and amending section 36(iva) for 14% government contributions are suggested. For capital gains, the removal of buyback tax, referencing section 50AA in sections 45(2A) and 55, clarifying excess-premium ULIP income, providing section 54B exemptions before agricultural land sale, preventing double deduction on interest, ensuring capital gain scheme deposits reflect sale consideration, and addressing JDA taxability for non-individuals/HUFs are recommended.

Table of Contents

A. Recommendation for the 2047 Vision of Viksit Bharat

1. Weighted Deductions for R&D Expenditure

B. Expectations and Recommendations for the ‘Business Income’

2. Determination of FMV for the purpose of section 28(iv)
3. Amendments on provisions related to disallowance on sum payable to MSEs
4. Concessional tax regimes for firm/LLPs
5. Conversion of gold held as stock-in-trade into EGR should not be taxable
6. Taxability of dividend income under the head profits and gains from business or profession
7. Exemption on transfer of shares held as stock-in-trade in amalgamation scheme
8. No section 44AD benefit for speculative business
9. Allow payment of advance tax in a single instalment under section 44AE presumptive scheme
10. Amendment of section 36(iva) for central government contributions up to 14% under section 80CCD

C. Expectations and Recommendations for the ‘Capital Gains’

11. Removal of buyback tax considering SEBI’S proposal
12. Reference of section 50AA in sections 45(2A) and 55
13. Clarification on classification of income from excess-premium ULIPs
14. Section 54B exemption for new agricultural land purchased before the sale of agricultural land
15. Clarification on prevention of double deduction on interest on borrowed capital
16. Capital gain account scheme deposits should reflect actual sale consideration, not stamp duty value
17. Taxability of capital gains in JDA entered by non-individuals or HUFs
18. Exclusion of specific years in capital gain provisions for sovereign gold bonds scheme

D. Expectations and Recommendations for ‘Crypto Currencies’

19. Clarity on ‘Situs of VDA’ for taxability in India
20. Inclusion of crypto ETFs in VDA
21. Provision for CBDT to prescribe FMV computation method under section 50AA and section 115BBH

E. Expectations and Recommendations for ‘Charitable Trusts’

22. Simplified taxation scheme for charitable trusts
23. Consequential amendment to section 13(9)

F. Expectations and Recommendations for ‘TDS and TCS’

24. Alignment of section 194-IA with section 50C/section 43CA
25. Inclusion of section 194-IA reference in section 197
26. Appeal rights against AO’s refund orders under section 195
27. Definition of ‘seller’ for TDS under section 194Q
28. Inclusion of individual or HUF as ‘seller’ for TCS under section 206C(1F)
29. Provision to deduct tax under section 194N as cash withdrawn is not income
30. Time limit for orders under section 201(3) if TDS not deposited
31. Consequential amendment to proviso of section 206C(5) due to omission of section 203AA
32. Expansion of scope for lower tax collection certificate application
33. Tax deduction on dividends paid by non-cash methods
34. Higher interest rate for non-deposit of TCS amount
35. Time limit for orders on tax deduction defaults for non-residents
36. Tax deducted in foreign country should be treated as assessee’s income

G. Expectations and Recommendations for ‘Business Trusts’

37. Long-term capital gain under section 112A taxed at 10% for business trusts
38. Uniform definition of SPV under income-tax act and SEBI regulations on REITs and INVITs
39. Clarification on pass-through of losses by business and securitisation trusts
40. Tax benefits for business trusts issuing rupee denominated bonds

H. Expectations and Recommendations for ‘Deductions & Exemptions’

41. Extension of section 80JJAA emoluments payment condition to new businesses
42. Audit requirement for exemption claims under section 80-IBA

I. Expectations and Recommendations for ‘Other Incomes’

43. No tax on interest from compensation received in appeal
44. Relaxation from Section 68’s 1st proviso for bank loans

J. Expectations and Recommendations for ‘Penalties’

45. Reference of sections 271AA and 271G in section 253
46. Penalty for start-ups not meeting conditions under section 80-IAC

K. Expectations and Recommendations for ‘Appeals & Assessments’

47. Non-automatic vacation of ITAT stay orders after 365 days
48. Broaden scope for not being an assessee-in-default

L. Other Expectations and Recommendations around Direct Taxes

49. Tax recovery on sale of securitised assets
50. Deduction for ‘maintenance charges’ on let-out property income
51. Insertion of government employee definition
52. Extension of various provision sunset dates
53. Definition and computation of the term ‘month’

M. Expectations and Recommendations around GST

54. Inclusion of petroleum products
55. Rate rationalisation
56. Revisiting GST provisions for the online gaming industry
57. Clarity on GST for crypto/NFT transactions
58. Revising ITC norms
59. Clarity on GST for permanent transfer/assignment of leasehold rights
60. GST on corporate guarantees
61. Allowing credit ledger balance use for reverse charge payments
62. Interest calculation on gross vs. Net tax amount post ITC use
63. Treatment clarity on post-sales discounts and incentives
64. GST complexities for sale of repossessed goods in banking and NBFC sectors
65. ITC reversal for exempt intermediate products transferred to distinct entities
66. Chargeability of GST on RCM transactions
67. Use of electronic credit ledger for pre-deposit payments
68. Provision to split composite supplies
69. Rationalisation of refund calculation for CIF contract exports without tax payment
70. Single central GST account for multi-state operations
71. Centralised GST advance rulings appellate authority
72. One-time dispute settlement scheme
73. Composition scheme option for small-scale ice cream manufacturers

N. Expectations and Recommendations around Custom Laws

74. Improvements in the AEO scheme
75. Rationalisation of customs exemptions process

The budget session presents the finance minister with a critical choice between a Populist Budget, a Progressive Budget, or perhaps a blend of both.

Unlike the election years of 2014 and 2019, the current government has typically refrained from announcing many tax sops for individual taxpayers. However, this year is an exception due to the government not securing a complete majority, necessitating the formation of a coalition government. Consequently, the newly elected government faces the crucial task of balancing the interests of its coalition partners while steering the economy towards sustainable growth and development.

Another significant area of focus for the Finance Minister will be achieving key milestones outlined in the Panchamrit Action Plan by 2030 and the Viksit Bharat Plan by 2047. With these targets in mind, the finance minister may present a blended budget that aims to provide something for everything.

In a populist budget, the finance minister might prioritise increased funding for social welfare programs and provide tax relief to taxpayers. The demographic profile of states represented by coalition parties suggests substantial budget allocations for agriculture, rural development, and social welfare. Historically, finance ministers have offered tax relief to individual taxpayers immediately following general elections. The new finance minister is expected to continue this tradition, providing some relief to small taxpayers.

On the progressive front, the government should focus on job creation, accelerating economic growth through infrastructure development, and pursuing net-zero emissions. Unemployment has been a core issue raised by all parties during the elections. To address this concern, the finance minister should announce new tax incentives for new-age manufacturing sectors and industries focusing on skill development to enhance employability.

The current government aims to achieve a USD 30 to 35 trillion economy by 2047. Critical factors in achieving this goal include developing multimodal connectivity to economic and industrial clusters, promoting domestic manufacturing, enhancing global competitiveness, and improving logistics efficiency. Consequently, the government may continue to allocate substantial funds for capital expenditure on infrastructure development. It is noteworthy that the government has already allocated Rs. 11.11 lakh crores for capital expenditure on infrastructure development during the interim budget.

India is committed to achieving net-zero emissions by 2070. Under its Panchamrit Action Plan, the country aims to reach several milestones by 2030, including a non-fossil fuel energy capacity of 500 GW, meeting at least half of its energy requirements via renewable energy, and reducing CO2 emissions by 1 billion tons. The budget may allocate significant funds towards renewable energy projects to meet these targets.

Given this context, the expectations and recommendations for the Union Budget 2024 encompass various economic, social, and environmental considerations. These objectives can be achieved through tax reforms, infrastructure development, promoting R&D and innovation, social welfare, and environmental sustainability.

This document outlines our concerns and offers recommendations for the upcoming budget, particularly in the area of tax reforms. We have also proposed certain amendments to the taxation laws to help resolve inconsistencies and conflicts within current provisions, bring greater clarity to taxation laws, and meet the taxpayer’s needs.

Here is a list of our recommendations and expectations for the Union Budget 2024-25.

A. Recommendation for the 2047 vision of Viksit Bharat

1. Weighted deductions for R&D expenditure

According to an estimate by the Department of Science & Technology, Ministry of Science & Technology[1], 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.

B. Expectations and Recommendations for the ‘Business Income’

2. 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[2].

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[3] 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.

3. 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.

4. 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.

5. 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.

6. 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

7. 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, being shares held by a shareholder in the amalgamating company (transferor), under a scheme of amalgamation is not regarded as 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 Govt. should bring parity and amend Section 47(vii) to extend the benefit of exemption to shares that are held as stock-in-trade.

Read More: Transfer of capital asset as a result of business restructuring on Taxmann.com/Practice

8. No Section 44AD benefit for speculative business

Section 44AD provides that an assessee being a resident individual, HUF or a 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:

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

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

9. 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 by the taxpayers. This provision provides that a taxpayer is required to pay the advance tax in four instalments during the financial year on or before the specified due dates. However, this provision allows the taxpayers who have opted for a presumptive taxation scheme under Section 44AD and Section 44ADA to pay 100% of advance tax by 15^th 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

10. Section 36(iva) should be amended to include the impact of the amendment made under Section 80CCD in respect of Central Government contributions up to 14%

Section 80CCD was amended by the Finance (No. 2) Act, 2019 to provide that the Central Government employees shall be allowed a deduction for the amount deposited in the NPS in respect of contribution made by the employer to the extent of 14% of salary in the previous year. Post amendment maximum admissible deduction in case of an employee would be as under:

(a) 14% of the salary, if the contribution is made by the Central Government.
(b) 10% of the salary, if the contribution is made by any other employer.

To allow deduction of such contribution, Section 36(iva) provides that deduction shall be allowed to the employer with respect to the contribution made by the employer towards NPS to the extent it does not exceed 10% of the salary of the employee.

Since the contribution of the Central Govt. towards NPS has increased from 10% to 14%, the consequential changes should be made in Section 36 to bring harmony between both sections.

Read More: Deduction for contribution to the pension scheme on Taxmann.com/Practice

C. Expectations and Recommendations for the ‘Capital Gains’

11. Buyback tax may be removed considering SEBI’s proposal

The buyback process often involves a limited number of shareholders offering to sell their shares to the company. However, this process can negatively affect the company and its shareholders. One major issue is the tax burden that the company incurs during the buyback process. The domestic company are liable to pay tax at the rate of 20% (plus 12% surcharge and 4% cess) of the distributed profit, which turns out to be an effective tax rate of 23.296%. This shifting of liability on the company negatively impacts the profitability of the company and ultimately reduces the returns for remaining shareholders. To address this concern, the SEBI has proposed making the buyback process taxable in the shareholders’ hand[4].

This change would address the tax burden issue and make the tax treatment of buybacks more fair and equitable. The shareholders of unlisted companies would have the option to take advantage of indexation when calculating capital gains. Shareholders of listed companies would also see a reduction in the tax rate on long-term holdings, which would be half of the current buyback tax rate and a decrease in the tax rate on short-term holdings as well. In addition, shareholders could claim a loss if the buyback price is lower than the issue price, which is currently not allowed.

12. 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.

13. Clarification is required on the classification of income arising from the 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:

(a) 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’.
(b) 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.

14. 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

15. 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 should 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.

16. 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:

(a) Where stamp duty value is higher than the full sales consideration;
(b) Deduction of tax at source (TDS) by the purchaser while remitting sales consideration; and
(c) 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[5] 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.

17. 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

18. 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’

19. 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

20. 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:

(a) Information or code or number or token generated through cryptographic means;
(b) Non-fungible token; and
(c) 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 36 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.

21. 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 50 B (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:

(a) Wazirx was Rs. 54,36,322;
(b) 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’

22. Simplified Taxation Scheme for Charitable Trusts

Presently, charitable trusts and institutions can claim an exemption under any of the following two regimes:

(a) Institutions approved by the Principal Commissioner or Commissioner of Income-tax (“PCIT / CIT”) under Section 10(23C); and
(b) Trusts registered under Section 12AA/ 12AB.

In the last couple of years, many amendments have been introduced to the provisions relating to the taxation of charitable and religious trusts. With these amendments, many differences between both regimes have been diluted, and many issues have been addressed. However, the following inconsistencies still remain;

(a) Explanation 1(2) to Section 11(1) provides an option to treat the subsequent year’s application as the current year’s application. However, Section 10(23C) does not offer a similar option.
(b) Capital gains arising to a charitable institution are not chargeable to tax if the institution invests the net consideration in acquiring a new capital asset [section 11(1)A]. This concession is not available under section 10(23C).
(c) Under Section 10(23C), there are two categories of institutions, approval-based and non-approval, whereas, in Section 12A, the exemption is allowed only to the registered institutions.

To simplify the tax provisions, it is recommended that the above gaps should be removed and the approval-based category of exemption under Section 10(23C) be merged with the tax regime under Sections 11 to 13.

23. 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:

(a) Circular be withdrawn
(b) 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’

24. 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.

25. 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.

26. 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.

27. 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

28. 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:

(a) “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

29. 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

30. Time limit to pass an order under Section 201(3) if the assessee fails to deposit TDS

Section 201(3) of the Act prescribes the time limit for the Assessing Officer to pass an order deeming a person to be an assessee-in-default for failure to deduct the tax from a person resident in India. The said order can be passed before the expiry of 7 years from the end of the financial year in which payment or credit was made or 2 years from the end of the financial year in which the correction statement was furnished by the assessee.

The section prescribes the time limit for the assessee who has failed to deduct the tax at source. In contrast, no time limit has been prescribed where the assessee has failed to deposit tax after deduction.

As a deductor is considered an assessee-in-default under Section 201(1) in both cases, that is, failure to deduct tax and failure to deposit tax after deduction, there should be a time limit for passing an order of assessee-in-default in both circumstances.

Thus, it is recommended that the Government should suitably amend the provisions of Section 201.

31. 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

32. 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

33. 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).

34. Higher rate of interest for non-deposit of TCS amount

Section 201 provides the consequences in case of any failure to deduct or to pay the tax deducted at source. The provision provides that the deductor shall be liable to pay interest at the rate of 1% per month/part of the month in case there is a failure to deduct tax. However, where a deduction has been made, but tax has not been deposited, the interest is levied at the rate of 1.5% for every month or part of the month.

In contrast to the above, Section 206C prescribed only a single rate of interest. If the collector fails to collect TCS or, after collecting, fails to deposit it with Govt., interest is levied at the rate of 1% for every month or part month. It is expected that the Govt. may bring parity in the penal provision for both defaults. Section 206C could be amended to provide a higher rate of interest in case tax has been collected but not deposited to the credit of the Central Govt.

Read More: Consequences of failure to collect or pay TCS on Taxmann.com/Practice

35. Time-limit may be specified for passing an order in case of default in deduction of tax from the payment made to non-resident

As per Section 201 of the Income-tax Act, if a person responsible for the deduction of tax at source, fails to deduct the whole or any part of the tax or after deduction fails to deposit the same to the credit of the Central Government, then he shall be deemed to be an assessee-in-default.

Sub-section (3) of Section 201 provides that no order deeming a deductor to be an assessee-in-default, on failure to deduct the tax from a person resident in India, shall be passed after the expiry of 7 years from the end of the financial year in which payment is made, or credit is given or after the expiry of 2 years from the end of the financial year in which correction statement is furnished, whichever is later. However, these time limits are applicable only when TDS defaults are related to payments made to a person resident in India. In other words, sub-section (3) does not apply if there is a default in the tax deduction with respect to payments made to a non-resident.

As no time limit has been prescribed under the Act for passing an order against a person who defaults in deducting or depositing tax with respect to payments made to a non-resident, various courts have held that the department can take action in a reasonable time but what should be a reasonable time, is quite controversial.

Hence, the Government may make a necessary amendment under sub-section (3) of section 201 to specify the time limit for passing an order of assessee-in-default where a person defaults in deducting or depositing tax in respect of payments made to a non-resident. It is recommended that the Govt. should bring both provisions to par.

Read More: Consequences of failure to deduct or pay TDS on Taxmann.com/Practice

36. Tax deducted in the foreign country should be treated as income of the assessee

Section 198 of the Income-tax Act, 1961 provides that the tax deducted at source should be included in the gross total income of the assessee. The bare provision of Section 198(1) is reproduced below:

‘All sums deducted in accordance with the foregoing provisions of this Chapter shall, for the purpose of computing the income of an assessee, be deemed to be income received’

Section 198 is covered under Chapter XVII of the Income-tax Act, which includes deduction/collection of taxes under Sections 192 to 206C. Thus, any tax deducted or collected under the Income-tax Act shall be deemed as income of the assessee and accordingly, it is added to the gross total income of the assessee.

However, the computation of income is often disputed if taxes have been withheld outside India and the corresponding income is offered to tax in India. In the absence of an explicit provision in this regard, the assessee includes the net income (i.e., the amount so remitted to India after withholding of taxes) to his gross total income. In contrast, the Assessing Officer assesses the gross amount.

This conflict arises due to the absence of a reference in Section 198 of taxes withheld outside India. Section 198 provides a deeming fiction with respect to the taxes deducted or collected as per the provisions of the Income-tax Act, 1961 and does not include taxes withheld outside India.

As the taxes paid outside India are eligible for the foreign tax credit under Section 90/90A read with Rule 128, it is apprehended that the amendments may be made to Section 198 to bring the income earned outside India at par with the income earned in India.

Read More: Foreign Tax Credit (FTC) on Taxmann.com/Practice

G. Expectations and Recommendations for ‘Business Trusts’

37. 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:

(a) Dividend received from SPV;
(b) Interest received from SPV; and
(c) 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

38. 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:

(a) 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
(b) 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

39. 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

40. 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’

41. 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:

(a) An account payee cheque;
(b) Account payee bank draft;
(c) By use of electronic clearing systems through a bank account; or
(d) 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

42. Audit might be necessary for claiming exemption under Section 80-IBA

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

(a) Part A: General
(b) Part B: Deductions in respect of certain payments
(c) Part C: Deduction in respect of certain incomes
(d) Part CA: Deduction in respect of other incomes
(e) 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’

43. 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[6] 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.

44. 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:

(a) the person in whose name such credit is recorded also offers an explanation about the nature and source of such sum so credited; and
(b) 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’

45. 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.

46. Start-ups may be penalised for not fulfilling conditions under Section 80-IAC

Income-tax Act contains provisions to allow various exemptions and deductions to start-ups. Section 56(2)(viib) provides an exemption from the angel tax to the start-up if it fulfils the conditions prescribed under notification No. GSR 127(E), dated 19-02-2019, issued by the DPIIT. Section 80-IAC provides deduction to the eligible start-up as defined therein up to 100% of the business profits for three consecutive assessment years.

A Proviso has been inserted to Section 56(2)(viib) by the Finance (No. 2) Act, 2019 to provide that in case of failure to comply with the conditions specified in the notification issued by DPIIT, the consideration received from the issue of shares, as exceeding the fair market value of such shares, shall be deemed to be the income of the company chargeable to tax for the previous year in which such failure takes place. Penal provisions under Section 270A were also introduced in case of failure to fulfil the conditions.

However, 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 a corresponding 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 ‘Appeals & Assessments’

47. 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

48. 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

L. Other Expectations and Recommendations

49. 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[7] 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.

50. 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

51. 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.

52. 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

53. 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, 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.

M. Expectations and Recommendations around GST

54. Inclusion of Petroleum Products under GST

The GST Council’s 45th meeting, held on September 17, 2021, discussed the inclusion of petroleum products in the GST framework. Although the decision was deferred by the Council, 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.

55. Rate rationalisation under GST

 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.

56. Revisiting 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 the full face value and not just on the platform fee. Consequently, the gaming companies have been served with the 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 the 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 review of these provisions has been postponed by the GST Council, and it is expected that the issue will be taken up for review 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 deposit is made by a player 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[8] 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[9] 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[10].

Considering the operational challenges and significant financial implications faced by the Indian gaming industry and the rise of offshore illegal betting and gambling activities, there is an immediate need to reassess the provisions that have been implemented. It is important for the Government to re-examine the taxation models in the gaming industry and align its taxation landscape with taxation models 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.

Read More: Specified Actionable Claim under GST on Taxmann.com/Practice

57. Clarity on GST applicability 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.

The Need for GST Amendments:

(a) Legal Clarity – Clear classification and taxation guidelines would help businesses understand their tax liabilities and reduce disputes with tax authorities.
(b) Alignment with Global Standards – Coordinating GST treatment of VDAs with global best practices would help Indian businesses remain competitive and aligned with international standards.
(c) Reducing Compliance Burden – Explicit rules would simplify compliance, enabling businesses to better navigate the tax system.

Specific provisions providing taxability of VDAs under GST are essential to provide legal clarity, reduce compliance burdens, and align 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.

58. Revisiting ITC norms in totality

Section 17 of the CGST Act imposes restrictions on the eligibility of ITC, creating complexities for businesses seeking to claim credits for input and input services used in their operations. This restricts the seamless flow of tax credits, leading to higher operational costs for businesses, especially in the manufacturing and services sectors.

For instance, Section 17(5) restricts ITC on goods and services used for the construction of immovable property on its own account. This restriction applies irrespective of whether the immovable property is constructed by the owner for the further sale of such property, which is not taxable under the GST law, or for providing outward taxable supplies such as leasing or renting services. As a result, ITC is not available on the construction costs, imposing a significant financial burden on the stakeholders.

Apart from the above, the provisions of Section 17(5) contain various ambiguities, which make their interpretation unclear.

For instance, ITC on works contract services or goods and services is available if these are supplied for the construction of plant and machinery. However, the interpretation of the meaning of ‘plant and machinery’ is unclear, which leads to litigations across different industries. Similarly, ITC on goods and services used for ‘personal consumption’ is blocked under the GST law. However, the law does not provide the context for interpreting the expression ‘personal consumption’.

Recommendations:

(a) Comprehensive Review – It is suggested to conduct a detailed review of Section 17 to identify specific restrictions that can be eased or removed to broaden ITC eligibility.
(b) Stakeholder Consultation – The Government may consider engaging with industry representatives to understand their challenges and refine the ITC framework accordingly.
(c) Phased Implementation – The Government may consider implementing these changes in a phased manner to allow businesses and tax authorities to adjust to the new regime.

Removing restrictions on ITC under Section 17 of the CGST Act can significantly benefit businesses by reducing costs and simplifying tax compliance. Aligning GST with the principles of the Income-tax Act, 1961, would foster a more conducive business environment, further advancing the Government’s objective of enhancing India’s economic growth and competitiveness.

Read More: Input Tax Credit on Taxmann.com/Practice

59. Clarity on GST applicability on permanent transfer/assignment of leasehold rights

The issue of taxing the permanent transfer of leasehold rights under the GST regime has generated considerable debate and uncertainty. Although the matter is currently sub-judice, issuing a circular to clarify the taxability would benefit all stakeholders and also clarify the taxability of the permanent transfer of leasehold rights, which would significantly benefit businesses by reducing uncertainty and litigation. By aligning it with the tax treatment of the sale of immovable property, the government can ensure a more consistent and predictable tax environment for stakeholders.

60. GST on Corporate Guarantee

Taxation of corporate guarantee has been a matter of litigation since the inception of GST. Specifically, when a holding company provides a corporate guarantee for its subsidiary company, it is argued that such activity is merely a shareholder’s activity and is not a service provided by the holding company.

However, with effect from 26-10-2023, a new sub-rule (2) has been inserted[11] to Rule 28 of the CGST Rules to provide a specific manner of valuation of corporate guarantee when a person provides corporate guarantee to any banking company or financial institution on behalf of its related person. Notably, the said provision has an overriding effect on the existing methods of valuation prescribed under Rule 28. After this insertion, the taxability of corporate guarantee has also been clarified by the CBIC by issuing a detailed Circular No. 204/16/2023-GST, dated 27-10-2023.

Further, the involvement of the service element in extending corporate guarantee is still a subject matter of litigation. Recently, the Punjab and Haryana High Court issued[12] notices to the Revenue and granted interim relief by putting a stay on part of the Circular. The Court also directed the authority to decide the case without being influenced by the impugned clarification.

Hence, it is recommended that suitable amendments must be made to the law to clarify the applicability of the given provision.

Read More: Valuation as per CGST Rules on Taxmann.com/Practice

61. Allowing utilisation of credit ledger balance for reverse charge payments

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.

Read More: Reverse Charge under GST and Electronic Credit Ledger under GST on Taxmann.com/Practice

62. Whether to compute interest on Gross or Net tax amount after utilising ITC?

Under the GST laws, the 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 should only be due on a net basis, i.e. 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[13] 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 18-9-2020, 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 should make necessary amendment in the said provision and issue detailed guidelines to resolve these ongoing disputes in the upcoming budget.

Read More: Interest due to Non-Compliance of GST provisions on Taxmann.com/Practice

63. Need for 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:

(a) The discount being agreed upon before or at the time of supply.
(b) The discount being linked to a specific invoice.
(c) 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 the deduction of discounts 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 as 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[14] 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[15] 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.

Read More: Various inclusions and exclusions in the value of supply and Documents under GST – Credit Note on Taxmann.com/Practice

64. Sale of Repossessed Goods under GST: Complexities for the Banking and NBFC Sectors

Under GST law, tax is levied on the supply of goods, services or both, and the value of such supply is determined in terms of Section 15 of the CGST Act, 2017 read with the CGST Rules, 2017.

For suppliers dealing in buying and selling second-hand goods, Rule 32(5) of the CGST Rules, 2017 provides a specific method for calculating the value of supply. This involves calculating the difference between the selling price and the purchase price, with negative values ignored. Thus, the value is determined based on the margin of the sale made by the supplier rather than the transaction value as per Section 15 of the CGST Act, 2017.

The proviso to Rule 32(5) provides a specific provision for determining the purchase value of repossessed goods from a defaulting borrower who is unregistered under the GST law in the case of recovery of a loan or debt. In such cases, the purchase price is deemed to be the purchase price of such goods by the defaulting borrower reduced by 5 percentage points for every quarter or part thereof between the date of purchase and the date of disposal by the person making such repossession.

Additionally, notifications on CGST rates[16] and Compensation Cess[17] offer concessional rates for specified old and used vehicles, provided the supplier has not claimed input tax credit.

However, the above set of provisions has multiple ambiguities in relation to the sale of repossessed goods by Banking Companies and Non-Banking Financial Companies (NBFCs), which are summarised below:

(a) The proviso to Rule 32(5) provides the manner of computing the purchase price only in cases where the defaulting borrower is unregistered. Thus, there is a lack of clarity on how to compute the purchase price when the defaulting borrower is registered.
(b) The drafting of Rule 32(5) does not suggest that the scenario of the sale of repossessed goods from the defaulting borrower is covered within its scope. Thus, it is not clear whether the proviso and Rule 32(5) can be harmoniously read together.
(c) Uncertainty as to whether the proviso considers the lender as ‘the person dealing in buying and selling of second-hand goods’.
(d) Eligibility of banking companies and NBFCs to avail of concessional rates under CGST and Compensation Cess.

The issue has been raised before the Gujarat High Court, where ICICI Bank Ltd. challenged[18] the show cause notice under Section 74 of the CGST Act, 2017 and argued that the provisions of Rule 32(5) are highly irrational, arbitrary and discriminatory as they distinguish between a registered and unregistered borrower. Further, the provision also discriminates between the banking industry and second-hand motorcar dealers.

Notably, the High Court has given an interim relief and directed the authority not to take any further steps pursuant to the impugned show-cause notice.

The complexities surrounding the application of Rule 32(5) of the CGST Rules pose challenges for Banking and NBFC players in determining the value of repossessed goods. Hence, clarity and harmonisation of provisions are essential to address these ambiguities.

Read More: Margin Scheme under GST on Taxmann.com/Practice

65. ITC reversal 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[19]. 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[20] that the supply of goods or services or both between the distinct persons shall be treated as supply when made in the course or 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.

66. Chargeability of GST on RCM transactions

The GST Law provides[21] that where the location of the supplier and the place of supply are in different States or Union territories, the supply is considered as inter-State supply. No exception has been carved out in the said provision in case of supplies liable to RCM. In the case of RCM, the recipient is liable to pay tax, and thereafter, the recipient will be eligible to claim ITC.

In cases where the supplier of the services is located in a state other than that of the recipient and the place of supply of services is the location of the recipient, IGST is required to be charged on such supply.

Where the supplier is registered under GST, the place of supply of such RCM supplies would be transmitted to the government through Form GSTR-1 of the supplier. However, where the supplier is unregistered and the recipient pays IGST, there is no clarity on which state such tax belongs to. Further, it would not be right to pay CGST and SGST as the supply qualifies as an inter-state supply.

Hence, it is recommended that either a specific provision in law containing which tax should be paid on such supplies be provided or relevant changes made in the GST return to contain the details of such tax be paid.

Read More: Reverse Charge under GST on Taxmann.com/Practice

67. Allow use of Electronic Credit Ledger balance for payment of pre-deposits

Under the GST laws, the pre-deposit for filing an appeal can be made through the electronic cash ledger. The law does not contain any specific provision for making such payments from the electronic credit ledger. The law states that the balance in the electronic credit ledger can be utilised towards the payment of output tax[22], but this would be subject to conditions and restrictions. Also, the law states that the balance of ITC can be utilised only towards the payment of self-assessed output tax[23].

Revenue and taxpayers often argue whether the pre-deposit can be paid using the balance in the electronic credit ledger. Dealing with this issue, the Orissa High Court[24] held that the credit balance in the electronic credit ledger could not be used for paying the pre-deposit amount. However, the Bombay High Court[25] and the Allahabad High Court[26] have held that the credit balance in the electronic credit ledger can be used to pay the pre-deposit amount.

Section 107(6)(b) of the CGST Act, 2017 does not use the term ‘tax’ but uses the term ‘sum’ for the payment of pre-deposit. Thus, the entire dispute revolves around the issue of whether the pre-deposit is an output tax liability. Hence, it is recommended that necessary amendments be made to the provisions allowing payment of pre-deposit through electronic credit ledger.

Read More: First Appeal before Appellate Authority on Taxmann.com/Practice

68. Enabling provision to split up a composite supply

Health care services provided by a clinical establishment, an authorised medical practitioner, or paramedics are exempted[27] from GST. However, with effect from July 18, 2022[28], the exemption is not available to the 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[29] 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 the supply of health care services even where it exceeds Rs. 5,000. Thus, exemption would be available on the whole of the supply of health care services, including the component of room rent.

Thus, 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, if 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’.

Read More: Composite Supply and Mixed Supply under GST on Taxmann.com/Practice

69. Rationalisation of formula for calculation of refund in case of export under CIF contract is made without payment of tax

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.

(a) Free on Board (FOB) value declared in the Shipping Bill or Bill of Export form, as the case may be; or
(b) 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 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 value. The formula for the calculation of refund of ITC should be rationalised, and in the case of CIF contracts, the CIF value of the goods should be considered for the calculation of refund.

Read More: Refunds of ITC on Zero-rated supplies made under LUT/ Bond on Taxmann.com/Practice

70. One single central GST account at the national level for companies having multi-state operations

In the current GST framework, businesses need to maintain separate state-level balances for Central Goods and Services Tax (‘CGST’) and 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 utilisation of credits and cash flows.

Advantages of National-Level CGST Balances:

(a) Improved Credit Utilization – A national-level CGST balance would allow businesses to offset liabilities across states, leading to better utilisation of available credits and cash.
(b) Reduced Compliance Costs – Consolidating CGST balances reduces the complexity of financial management, making compliance easier and less expensive for businesses.
(c) Enhanced Business Efficiency – National-level CGST balances would streamline tax management, allowing businesses to focus on core activities rather than managing disparate tax credits.

Benefits for the Government:

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

71. Introduction of a centralised Appellate Authority for GST Advance Rulings

The proposal to establish a centralised Appellate Authority for Advance Rulings (‘AAAR’) was suggested by the 31^st GST Council meeting to resolve cases where differing or conflicting decisions are made by Advance Ruling Authorities (‘ARAs’) in various states. Fast-tracking the implementation of this centralised authority is crucial for several reasons:

Current Challenges with State-Level ARAs:

(a) Inconsistent Rulings – Different ARAs often issue contradictory rulings on the same issue, leading to uncertainty and confusion for businesses.
(b) Increased Litigation – Conflicting rulings push businesses to challenge decisions, resulting in increased litigation and higher costs for both businesses and the government.
(c) Operational Delays – Businesses face operational delays while seeking clarity on tax positions due to varying interpretations across states.

Benefits of a Centralized AAAR:

(a) Uniformity in Rulings – A centralised AAAR would ensure consistency in rulings, providing businesses with a clear understanding of tax implications nationwide.
(b) Reduced Litigation – Consistent and authoritative rulings would minimise disputes, reducing the burden on judicial systems and business costs.
(c) Ease of Doing Business – Uniform decisions would enhance the ease of doing business by providing clarity and predictability in tax matters.

Fast-tracking the establishment of a centralised AAAR would significantly benefit businesses and the government by ensuring consistency in tax rulings, reducing litigation, and improving the ease of doing business. By prioritising this proposal, the Government can address the challenges of conflicting advance rulings and provide a more stable tax environment for all stakeholders.

72. One-time Dispute Settlement Scheme

Introduced in the Union Budget of 2019, the Legacy Dispute Resolution Scheme was designed to clear the backlog of disputes under various central indirect tax laws. This scheme allowed for voluntary disclosure and settlement of pending disputes, providing relief in penalties and interest to encourage compliance and closure. Its success was evident in the enthusiastic response from the industry, signifying the scheme’s effectiveness in reducing litigation and facilitating a smoother transition to the GST regime.

Proposal for a Similar Scheme under GST

(a) Evolving Legislation – Since its inception in 2017, the GST law has undergone numerous amendments and clarifications, reflecting its evolving nature. Businesses, particularly small and medium enterprises, have faced challenges keeping pace with these changes, often leading to unintentional non-compliance.
(b) Reducing Litigation – Under the current GST framework, a significant volume of disputes and ambiguities lead to potential litigation. A dispute resolution scheme can provide a straightforward path for businesses to resolve these issues.
(c) Encouraging Compliance – By introducing a scheme that allows voluntary disclosure before a GST audit, the government can incentivise businesses to come forward and settle their past liabilities, ensuring a cleaner slate moving forward.

A GST-specific Legacy Dispute Resolution Scheme could replicate the success of the previous scheme under central indirect taxes, providing much-needed relief and clarity to businesses grappling with GST compliance. It would also demonstrate the government’s commitment to fostering a more cooperative tax environment and ensuring the smooth functioning of one of the largest tax reforms in Indian history.

73. Allowing 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 a luxury good without proper reasoning.

Recently, this issue came before the Chhattisgarh High Court, wherein the Hon’ble Court directed[31] 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[32] on the same matter.

The issue is expected to be covered in the upcoming budget.

Read More: Composition Scheme under GST on Taxmann.com/Practice

N. Expectations and Recommendations around Custom Laws

74. Improvements in the current AEO Scheme

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:

(a) Current Scenario – AEO-Tier 2 and 3 holders currently enjoy a 15-day duty deferment period.
(b) 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:

(a) Current Scenario – Under the general law, a pre-deposit of 7.5% to 10% is required for appeals against duty demands.
(b) 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.

75. Rationalisation process with respect to customs exemptions

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

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

---

[1] Research & Development Statistics at a Glance

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

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

[4] Consultation Paper on Review of SEBI (Buyback of Securities) Regulations, 2018

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

[6] 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)].

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

[8] Press Trust of India dated 19-04-2024

[9] Section 14A of the IGST Act

[10] Section 14A(3) of the IGST Act

[11] Notification No. 52/2023- Central Tax, dated 26-10-2023

[12] Acme Cleantech Solutions (P.) Ltd. v. Union of India [2024] 162 taxmann.com 151 (Punjab & Haryana)

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

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

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

[16] Notification No. 8/2018-Central Tax (Rate), dated 25-01-2018

[17] Notification No. 1/2018-Compensation Cess (Rate), dated 25-01-2018

[18] ICICI Bank Ltd. v. Union of India [2022] 144 taxmann.com 82 (Gujarat)

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

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

[21] Section 7(3) of the IGST Act

[22] Section 49(4) of the CGST Act, 2017

[23] Section 41(1) of the CGST Act, 2017

[24] Jyoti Construction v. Deputy Commissioner of CT & GST, Jajpur [2021] 131 taxmann.com 104 (Orissa) dated 07-10-2021

[25] Oasis Realty v. Union of India [2022] 143 taxmann.com 5 (Bombay) dated 16-09-2022

[26] Tulsi Ram and Company Vs Commissioner [2022] 143 taxmann.com 6 (Allahabad) dated 23-09-2022

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

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

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

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

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

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