Weekly Round-up on Tax and Corporate Laws | 30th January to 04th February 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from January 30th to February 04th 2023, namely:

(a) Highlights of the Finance Bill 2023;

(b) Overview of Economic Survey for 2022-23;

(c) SEBI unveils two additional methods for Listed Cos. to meet ‘Minimum Public Shareholding’;

(d) Time to issue show-cause notice also stands extended if the time period to issue an order is extended: HC;

(e) High Court directs quashing the order of cancellation of registration as the assessee is keen to continue business and filed returns with late fee; and

(f) Should a corporate guarantee to the bank by a holding co. be recognised as a financial guarantee or contingent liability?

1. Highlights of the Finance Bill 2023

On February 01st 2023, the Finance Minister, Smt. Nirmala Sitharaman, presented her fifth Union Budget in Parliament. Various key amendments have been proposed in the Finance Bill 2023, including the new avatar of the alternative tax regime, increase in threshold limit for the presumptive taxation scheme, change in TCS provisions under Section 206C, and so on.

A few of the key changes are mentioned below:

(a) In the new tax regime of Section 115BAC, the maximum exemption limit shall be Rs. 3 lakhs, and for every additional income of Rs. 3 lakhs, the tax rate will increase to the next slab. The highest tax rate of 30% will continue to apply on income above Rs. 15 lakhs;

(b) In the new tax regime, the threshold of total income for rebate under Section 87A is increased from Rs. 5 lakhs to Rs. 7 lakhs. Further, the highest rate of surcharge of 37% on income above Rs. 5 crores is reduced to 25%;

(c) TDS on EPF withdrawal is reduced to 20% instead of the maximum marginal rate in non-PAN cases;

(d) Maximum exemption of Rs. 10 crores can be claimed under Sections 54 and 54F;

(e) Winning from any online game is to be taxed at 30% (plus surcharge and cess) under the new Section 115BBJ;

(f) Receipts from life insurance policies issued on or after 01-04-2023 shall be taxed as income from other sources, if the premium paid is above Rs. 5,00,000 in a year;

(g) The rate of TCS on overseas tour packages increased from 5% to 20%, without any threshold benefit;

(h) Deduction for the sum payable to MSMEs shall be allowed only on a payment basis under Section 43B;

(i) A new Section 115BAE is introduced to provide a 15% concessional tax rate (plus 10% surcharge and cess) to the new manufacturing cooperative societies;

(j) Gains arising on transfer, redemption, or maturity of Market Linked Debentures are to be taxed as short-term capital gains under Section 50AA;

(k) Consideration received from non-resident investors will be subject to Section 56(2)(viib);

(l) The threshold limit for TDS under Section 194N is increased from Rs. 1 crore to Rs. 3 crore, where the recipient is a cooperative society.

Download copy of ‘Highlights to Finance Bill, 2023’

Check out Taxmann's Budget Guide | 2023-24 which is a comprehensive commentary on proposed provisions of Finance Bill 2023, authored by Taxmann's Editorial Board. It covers provisions relating to Direct Tax Laws, Indirect Tax Laws and Corporate & Allied Laws. It explains all complex provisions through examples/illustrations, which helps the reader comprehend the new provisions in a simplified manner.

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2. Overview of Economic Survey for 2022-23

Economic Survey is an annual report published by the Government of India to present an overview of the Indian economy. It includes an analysis of the economic performance, key trends, outlook for the current financial year, and initiatives and reforms. The Economic Survey is prepared by the Economic Division of the Department of Economic Affairs under the guidance of the Chief Economic Advisor. After approval by the Finance Minister, it is presented in the Parliament.

The Economic Survey for the year 2022-23 was tabled by Finance Minister in the Lok Sabha on 31-01-2023. The key discussions relating to the Economy, Direct Tax, Indirect Tax, Banking, Primary Capital Markets, and IBC Laws highlighted in the Economic Survey are as under:

(a) The rate hike by the US Fed drove capital into the US markets causing the US Dollar to appreciate against most currencies. This led to the widening of the Current Account Deficits (CAD) and increased inflationary pressures in net importing economies;

(b) Global growth has been projected to decline in 2023 and is expected to remain generally subdued in the following years as well. The slowing demand will likely push down global commodity prices and improve India’s CAD in FY24;

(c) The Indian economy, however, appears to have moved on after its encounter with the pandemic, staging a full recovery in FY22 ahead of many nations and positioning itself to ascend to the pre-pandemic growth path in FY23. Yet in the current year, India has also faced the challenge of reining inflation;

(d) The Capital Expenditure (Capex) of the central government, which increased by 63.4% in the first eight months of FY23, was another growth driver of the Indian economy in the current year. The Centre’s Capex has increased from a long-term average of 1.7% of GDP (FY09 to FY20) to 2.5% of GDP in FY22 PA. In the Union Budget 2023, the Finance Minister announced that the Budgeted capital expenditure in FY 2023-24 shall be 3.3% of GDP, amounting to Rs. 10 lakh crores;

(e) RBI has projected headline inflation at 6.8% in FY23, which is outside its target range. It is not high enough to deter private consumption and not so low to weaken the inducement to invest;

(f) The survey projects a baseline GDP growth of 6% to 6.8% in real terms in FY24.

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3. SEBI unveils two additional methods for Listed Cos. to meet ‘Minimum Public Shareholding’

Earlier, SEBI had permitted different methods that listed entities can use to comply with the minimum public shareholding (MPS) requirements as mandated under Rule 19(2)(b) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957 read with Regulation 38 of the SEBI (LODR) Regulations, 2015.

After that, SEBI received various representations from listed companies and other stakeholders requesting relaxation from compliance with the conditions specified in the existing methods and approval for using non-prescribed methods to achieve MPS compliance.

Accordingly, the SEBI has reviewed the existing methods, and the following two additional methods have been introduced:

(a) Achieving the MPS via ESOP;

(b) Transfer of shares held by the promoter(s)/promoter group to an Exchange Traded Fund (ETF). Under the extant norms, every listed company is required to maintain an MPS of 25%. The existing methods to comply with MPS norms are as follows:

(a) Issue of shares to the public through the prospectus;

(b) Offer for sale of shares held by promoters to the public through the prospectus;

(c) Offer for sale of shares held by the promoter/promoter group through the Stock Exchange mechanism (the secondary market);

(d) Right issue to public shareholders with promoter/promoter group shareholders forgoing their entitlement of equity shares;

(e) Bonus issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement of equity shares;

(f) Allotment of eligible securities through Qualified Institutions Placement in terms of Chapter VI of the SEBI (ICDR) Regulations, 2018; and

(g) Sale of shares held by the promoter/promoter group in the open market subject to the specified conditions.

The additional methods issued by the SEBI would enable the listed companies to achieve the 25% minimum public shareholding (MPS) requirement. It would further lead to the availability of more options to achieve the MPS.

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4. Time to issue show-cause notice also stands extended if the time period to issue an order is extended: HC

The Kerala High Court has held that if the time limit to issue an order is extended till 30-9-2023 for 2017-18, then the time limit for show cause notice would also be extended automatically with reference to that date.

The petitioner challenged the order passed by the GST department under Section 73 and contended that the time limit to issue an adjudication order had been extended for the financial year 2017-18, but the time limit for the extension of show cause notice had not been extended. It filed a writ petition and argued that unless show cause notice is issued within the time specified in Section 73(2) of the CGST Act, the entire proceedings have to be declared as one without jurisdiction.

The High Court noted that the liability imposed by the impugned order on the petitioner was in respect of the financial year 2017- 2018. As per Section 73(2) and Section 73(10), a show-cause notice is required to be issued at least three months before the time specified to issue the order. However, the time period for issuance of the order has been extended, and therefore, the time limit to issue a show-cause notice also stands extended with reference to such date. Since the due date for issuing the order for 2017-2018 has been extended till 30-9-2023, the same would apply to the computation of the time limit for issuance of show-cause notice. Thus, the impugned order could not be said to be issued without jurisdiction, and the writ petition was dismissed.

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5. High Court directs quashing the order of cancellation of registration as the assessee is keen to continue business and filed returns with late fee

The Gujarat High Court has held that the assessee is keen to continue his business and has already filed returns with late fees. The State should not thwart the business prospects of its citizens, and therefore, the order of cancellation of registration is quashed, and the department is directed to restore GST registration.

The petitioner was a contractor engaged in providing construction services. The petitioner did not file the returns after September 2018. A show-cause notice was issued due to the non-filing of returns, and the registration was cancelled. It filed all pending returns and an appeal against the cancellation, but the appeal was rejected. It filed a writ petition against the cancellation and contended that the person engaged by the petitioner was under the impression that since outward supply was zero, there was no need for filing the return.

The High Court noted that the petitioner was under the belief that he was not required to file the returns due to zero supply, and secondly, his consultant had not advised him correctly, which led to the non-filing of the returns. However, the petitioner filed all returns from September 2018 to March 2021, and a late fee was deposited since it expressed all kinds of readiness to continue the business. After considering the extension of limitation by the Supreme Court due to COVID-19, the Court held that the order of cancellation of registration was to be quashed.

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6. Should a corporate guarantee to the bank by a holding co. be recognised as a financial guarantee or contingent liability?

As per para 10 of Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets), a contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Therefore, a corporate guarantee issued by the company on behalf of its subsidiary to the banks for a short-term loan facility, when there has been no default by it in loan servicing in the past and no such default is expected in future, and it has been disclosed in Notes to accounts under details of ‘Loans, Investment, Guarantees and Security’.

But confusion arises while recording such corporate guarantees, where the obligation to recoup for losses is on the company, be recognised as a financial guarantee as per Ind AS 109 or contingent liability as per Ind AS 37.

In this regard, the Expert Advisory Committee (EAC) of ICAI has noted that a financial guarantee contract is defined under Ind AS 109 as a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. For a financial guarantee under Ind AS 109 to exist, amongst others, there shall be a reimbursement for loss incurred by a specified debtor. If the subsidiary does not make payment to the bank, the bank has a right to recoup the loss suffered by it from the company. The Committee is of the view that the corporate guarantee issued by the company to the bank meets the definition of a financial guarantee contract given in Ind AS 109. Accordingly, the company should account for the financial guarantee contracts as per the requirements of Ind AS 109.

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