Weekly Round-up on Tax and Corporate Laws | 05th to 10th December 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 05th to 10th December 2022, namely:

(a) UAE bring the law to levy 9% corporate tax with effect from 1st June 2023;

(b) Highlights of the RBI’s statement on developmental and regulatory policies;

(c) A transaction can’t be treated as Benami if the alleged beneficial owner is actually the joint owner of the property: ITAT

(d) Proceedings are to be initiated under Section 73/74 if the owner of goods doesn’t come forward to pay the penalty under Section 129 of the CGST Act: High Court

(e) High Court sets aside non-speaking order rejecting the application for registration under GST on failure to disclose the principal place;

(f) Should compulsory convertible debenture (CCD) be treated as equity or financial liability?

1. UAE bring the law to levy 9% corporate tax with effect from 1st June 2023

The Ministry of Finance of the United Arab Emirates (UAE) has published Federal Decree-Law No. 47 of 2022, providing the legislative framework to levy corporate tax on business profits in the UAE.

UAE Corporate Tax (UAE CT) will become effective for financial years starting on or after 1st June 2023. It shall apply to:

(a) Individuals who are engaged in a business or business activity in UAE through an unincorporated partnership or sole proprietorship;

(b) Juridical persons incorporated in the UAE;

(c) Juridical persons effectively managed and controlled in the UAE; and

(d) Foreign juridical persons that have a Permanent Establishment in the UAE.

The decree provides that the financial statements of businesses should be prepared in accordance with accounting standards accepted in the UAE. Taxpayers should prepare financial statements on an accrual basis unless they are permitted to use the cash basis of accounting.

Further, to determine the taxable income, transactions and arrangements between related parties must meet the arm’s length standard. The arm’s length result of a transaction must be determined by applying one or a combination of the prescribed transfer pricing methods.

The corporate tax shall be imposed on the taxable income at the following rates:

(a) For individuals and juridical persons: 9% of taxable income that exceeds the specified amount (to be decided by cabinet).

(b) In the case of Qualifying Free Zone Persons: 9% of taxable income which does not meet the qualifying income definition.

Read the Decree-Law

2. Highlights of the RBI’s statement on developmental and regulatory policies

The RBI has released the Monetary Policy Statement 2022-23. This statement sets out various developmental and regulatory policy measures relating to (i) Regulation and Supervision; (ii) Payment and Settlement Systems; and (iii) Financial Markets. The key highlights of the RBI’s Statement are discussed below:

2.1 RBI increases the repo rate under the liquidity adjustment facility (LAF) by 35 basis points to 6.25%

Based on an assessment of the macroeconomic situation, the Monetary Policy Committee has decided to increase the repo rate under the liquidity adjustment facility (LAF) by 35 basis points to 6.25%. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.00% and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.

Further, the MPC has also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target in the future while supporting growth. Adequate consideration has been given to the Global and Domestic Economy, Inflation, etc. These decisions align to achieve the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent while supporting growth.

2.2 RBI plans to improve UPI by introducing Single Block and Multiple Debits functionalities

Unified Payments Interface (UPI) has emerged as a popular retail payments system for Person to Person (P2P) and Person to Merchant (P2M) transactions. More than half of Initial Public Offer (IPO) applications are processed using the block feature of UPI. RBI now plans to enhance UPI by introducing processing mandates with a single block and multiple debits. The new functionality would allow customers to create payment mandates against a merchant by blocking funds in the bank account for specific purposes, which can be debited whenever required.

This would be helpful for hotel bookings, purchasing securities in the secondary capital market and government securities using the RBI’s Retail Direct scheme, e-commerce transactions, etc. Separate instructions to the National Payments Corporation of India (NPCI) will be issued shortly.

2.3 Expansion of the scope of the Bharat Bill Payment System (BBPS) to include all Payments and Collections

Bharat Bill Payment System (BBPS), an interoperable platform operated by NPCI Bharat BillPay Ltd. (NBBL), has facilitated the bill payment needs of consumers and billers alike. The volume and value of transactions handled on the platform have been increasing steadily.

As of now, BBPS currently does not enable non-recurring payments or collection requirements of individuals which are recurring in nature. Now, RBI has decided to expand the scope of BBPS to include all categories of payments and collections, both recurring and non-recurring in nature. Separate guidelines will be issued to NBBL in this regard.

2.4 RBI permits resident entities to hedge their gold price risk on recognised exchanges in the IFSC

Resident entities in India are currently not permitted to hedge their exposure to gold price risk in overseas markets. To provide greater flexibility to these entities to hedge the price risk of their gold exposures efficiently, the RBI has decided to permit resident entities to hedge their gold price risk on recognised exchanges in the International Financial Services Centre (IFSC).

2.5 Held to Maturity (HTM) category hiked from 19.5% to 23% of net demand and time liabilities

Earlier, the limits under Held to Maturity (HTM) category was 19.5 per cent of net demand and time liabilities (NDTL). Now, the RBI has increased the HTM limit to 23 per cent in respect of statutory liquidity ratio (SLR) eligible securities acquired on or after 1st September 2020 and up to 31st March 2023.

This dispensation of enhancement in HTM limit was made available up to 31st March 2023. Further, the HTM limits would be restored from 23 per cent to 19.5 per cent in a phased manner starting from the quarter ending 30th June 2024.

Read the Press Release

3. A transaction can’t be treated as Benami if the alleged beneficial owner is the joint owner of the property: ITAT

Assessee-company filed original return of income declaring loss. The Assessing Officer (AO) noted that the assessee and one ‘R’ purchased a property in New Delhi. The assessee held 95%, and ‘R’ had a 5% stake.

Based on some reports in the newspaper, the AO held that an arrangement of purchase of property in the name of the assessee was made by ‘R’ by paying the entire consideration himself. The AO held that the assessee was only for the namesake and ‘R’ takes all the decisions relating to the property.

AO examined the purchase of property in the light of the provisions of prohibition of the Benami Property Transaction Act, 1988, and held that ‘R’ was de-facto the owner of the property.

On appeal, the CIT(A) reversed the order of AO. Aggreived-AO filed the instant appeal before the Tribunal.

The Delhi Tribunal held that AO relied on news clippings to state that ‘R’ purchased property. However, the purchase of property by ‘R’ is not inaccurate, as he is one of the joint owners of the property as per the registered sale deed. The assessee also disclosed this fact in its books of accounts.

Further, AO also reiterated the source of the purchase consideration, which was already disclosed in the books of accounts of the assessee. Property to be classified as Benami, the first premise is payments of purchase consideration by a person other than the person in whose name the property is held. In the assessee’s case, AO’s allegation was that part of the purchase consideration was indirectly paid by ‘R’, who is indeed the joint owner of the property. Thus, the first basic premise clearly fails.

The second premise to classify a transaction as Benami is the non-disclosure of facts, source of consideration or creation of fictitious ownership, which shows the real transaction to be different from the apparent transaction. The relationship of ‘R’ was also disclosed in the documents and books of account. There were no undisclosed transactions, facts, or involvement of any party apart from the parties to the transaction. Hence, the second basic premise also fails.

Read the Ruling

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4. Proceedings are to be initiated under Section 73/74 if the owner of goods does not come forward to pay the penalty under Section 129 of the CGST ACT: HC

The Allahabad High Court has held that the department is empowered to initiate proceedings under Section 73 or Section 74 of the CGST Act read with Section 122 if the owner of goods does not come forward to pay the penalty under Section 129. The Court also set aside an order determining a penalty under Section 129 as the determination of tax due can be made only under Section 73 or Section 74.

Facts

The department detained the goods and vehicle, and a show cause notice was issued under Section 129(3). However, the goods and vehicles were released on furnishing bank guarantee. It submitted a reply to the notice and the department issued an order imposing tax liability and penalty. It contended that the department didn’t serve a copy of the order, and it could not file an appeal. Therefore, the writ petition was filed, challenging the validity of the order under Section 129.

High Court

The High Court noted that the tax liability had been determined and the penalty imposed under Section 129 of the CGST Act. However, there is no power to determine the penalty payable under Section 129 as it can be done only in terms of the mandate of Section 122 of the CGST Act. The Court also noted that the department is empowered to initiate proceedings under Section 73 or Section 74 of the CGST Act read with Section 122 if the owner of goods does not come forward to pay the penalty under Section 129. Thus, it was held that the impugned orders were not sustainable, and the amount paid for the release of goods was directed to be refunded to the petitioner.

Read the Ruling

5. HC set aside non-speaking order rejecting the application for registration under GST for failure to disclose the principal place

The Madras High Court has held that rejection of the registration application by non-speaking and arbitrary order passed without considering the copy of the rental/lease deed uploaded as proof of the principal place of business is not sustainable. The Court has also directed the department to pass reasoned order after hearing the petitioner on objections raised by it

Facts

The petitioner had made an application seeking new GST registration. A notice was issued by the department seeking clarification with respect to the application for registration. The clarification sought was that the application did not enclose the details of the principal place of business of the petitioner. The petitioner duly responded by uploading a copy of the rental/lease deed duly registered in the office of the Sub-Registrar as proof of the principal place of business. However, the application was rejected, and it filed a writ petition against the order contending that the order was cryptic and entirely non-speaking.

High Court

The High Court noted that the petitioner responded to the objection raised by the department and uploaded a copy of the rental/lease deed duly registered in the office of the Sub-Registrar as proof of the principal place of business. Still, the rejection of the application simply by a monosyllabic order, i.e. ‘rejected’ was indefensible and not sustainable inasmuch as such an order of this nature was non-speaking, arbitrary and failed to take into account the explanation furnished by the petitioner.

The Court also held that the contention of the department that the word ‘may’ occurring in Rule 9(4) of Central Goods and Services Tax Rules, 2017 grants discretion to authority to assign reasons, would not be acceptable as said word only refers to discretion to reject and not to violate principles of natural justice blatantly. Therefore, the Court also directed the department to pass reasoned order after hearing the petitioner on objections raised by it.

Read the Ruling

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6. Should Compulsory Convertible Debenture (CCD) be treated as equity or financial liability?

As per paragraph 31 of Ind AS 32, the issuer of a compound financial instrument will have to split the financial instrument into liability and equity portions by first calculating the liability portion, and the residual will be the equity portion. For this purpose, the company has to calculate the present value of its cash flows for interest as a liability and the residual amount as the equity component. Further, when the financial instruments are initially recognised, the entity determines the appropriate classification as a financial liability, equity or a combination of both.

But, confusion arises while recording compulsory convertible debentures (CCDs), which are convertible only in the hands of sponsors at the end of their tenure. The company is required to convert CCDs into equity shares by reckoning the prevailing share price at the time of conversion. Whether these CCDs are to be treated as a compound financial instrument, equity, or liability, knowing that the company’s liability is limited to the payment of interest and issue of equity shares to sponsors only as the value of CCDs is paid back to investors by the sponsors upon exercising of the put option.

In this regard, the Expert Advisory Committee (EAC) of ICAI has noted that interest is payable by the company as per the terms of the CCDs, which is clearly meeting the criteria for financial liability classification. Further, a contract is not an equity instrument solely because it may result in the delivery of the entity’s own equity instruments. Here CCDs are convertible in the hands of sponsors at the end of the tenure at a prevailing price, such that the rights attached to those equity shares are varied so that the settlement value equals a fixed amount, is a financial asset or a financial liability.

Accordingly, the CCDs do not meet the criteria for being classified as compound instruments as there is no equity component. The CCDs should be classified as financial liabilities in entirety.

Read the Story