Budget 2016 Presentation - Part II (Domestic Corporate Direct Tax)

Unravelling Domestic Corporate Direct-Tax Proposals

4th March 2016

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Part II

Sr. No. Topic of Amendment Slide Nos.

1 Tax Rate for Domestic Companies 5 - 7

2 Place of Effective Management 8 - 10

3 Concessional Tax Regime for Patents 11 - 12

4 Incentives for Start-ups 13 - 14

5 New Section 54EE 15 - 16

6 Amended Section 54GB 17 - 18

7 Taxation of Dividend income in the hands of Recipient 19 - 20

8 Buy-Back Distribution Tax 21 - 22

9 Phasing out of Exemptions and Deductions 23 - 28

10 Amrotisation of Spectrum Fees 29 - 30

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11 Rationalisation of Section 50C 31 - 32

12 Rationalisation of TDS Provisions 33 - 35

13 Section 206AA: Exemption (from PAN) to Non-Residents 36 - 37

14 Tax Collected at Source (TCS) 38 - 39

15 Section 14A – Modification of Rule 8D Formula 40 - 41

16 Incentives for Employment Generation 42 - 43

17 Incentives to Promote Housing for All 44 - 47

18 Stay of Demand 48 - 52

19 Additional Depreciation to Power Transmission Companies 53 - 54

20 Rationalisation of Section 32AC Tax Incentive 55 - 56

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21 Carry Forward of Loss from Business Specified under Section 35AD 57 - 58

22 Tax Exempt Conversion of Company into LLP - Additional Condition 59 - 60

23 Filing of Belated Return and Revised Return: New Provisions 61 - 62

24 Processing of Return under Section 143(1) 63 - 65

25 E-Assessments 66 - 67

26 Change in Deadline for Assessments 68 - 71

27 Interest on Refund 72 - 76

28 Change in Penalty Provisions 77 - 79

29 Immunity from Penalty and Prosecution 80 - 83

30 New Dispute Resolution Scheme 84 - 86

31 Income Declaration Scheme 2016 87 - 90

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ta29% 18.5%

Tax Rate MAT Rate

Tax Rate for companies having turnover less than 5Crores is 29%

Surcharge of 7% if net income Exceeds Rs. 1 Crore

Education Cess and Secondary & Higher Educationcess at 3% of Income and Surcharge

ta30% 18.5%

Tax Rate MAT Rate

Companies having Turnover Less than 5 Crores Companies having Turnover More than 5 Crores

Tax Rate for companies having turnover more than 5Crores is 30%

Surcharge of 7% if net income Exceeds Rs. 1 Crore and12% if net income exceeds Rs. 10 Crores

Education Cess and Secondary & Higher Educationcess at 3% of Income and Surcharge

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ta25% 18.5%

Tax Rate MAT Rate

Newly Established Manufacturing Companies

The Company should be Registered on or after 1st ofMarch, 2016, and engaged in the business ofmanufacture or production of any article or thing;

The Company should not claim any benefit undersection 10AA, benefit of accelerated depreciation,benefit of additional depreciation, investmentallowance, expenditure on scientific research and anydeduction in respect of certain income under Part-Cof Chapter VI-A (other than the provisions of section80JJAA)

The Company must furnishes Option to claim thisbenefit before due date of furnishing the return ofincome

Option for New Manufacturing Companies

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The POEM provision is deferred by 1 year. Hence, POEM provisions will now apply from FY 2016-17

The determination of residence, based on POEM, shall be now applicable from AY 2017-18

Transition Provisions (New Chapter XII-C) have been inserted in the I T Act 1961

• Problems may arise when a foreign company is held to be resident, in course of assessment, under the POEM rule.

• In such scenario, the Foreign Company cannot comply with various procedural provisions (TDS, Filing of Return of Income, etc.) because the relevant FY would have already ended.

• So, Transition Provisions have been proposed in the Budget 2016.

Final POEM Guidelines from CBDT are still awaited

Foreign Company

POEM in India (Resident in India)

Will not only be taxed - in India - on Global Income , but will also have to comply with the provisions of the Income Tax Act, 1961 related to:

• Computation of Total Income (including Transfer Pricing, Filing of Return of Income, etc.)

• Treatment of Unabsorbed Depreciation

• Set-off and Carry Forward of Loss

• Collection & Recovery of Tax (TDS, etc.)

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POEM Transition Provisions

A transition mechanism is provided for a company which is incorporated outside India and has not earlier beenassessed to tax in India.

The Central Government will be empowered to notify exception, modification and adaptation subject to which,the provisions of the Act relating to –

computation of income,

treatment of unabsorbed depreciation,

setoff or carry forward and setoff of losses,

special provision relating to avoidance of tax, and

the collection and recovery of taxes

shall apply in a case where a foreign company is said to be resident in India due to its POEM being in India for thefirst time, and where such company has never been resident in India before.

These transition provisions would also cover any subsequent previous year upto the date of determination ofPOEM in an assessment proceedings.

However, once the transition is complete, then normal provision of the Act would apply.

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OECD BEPS Action Plan 5 Nexus Approach for R&D Activity

Royalty Income will be Taxed at 10% on Gross Basis

For Levying of MAT:

• The Royalty Income & related Expenditure, appearing in the P&L Account, will be reversed.

Conditions to be fulfilled

Patent should be developed & Registered in India

The Eligible Assessee should be a resident of India & a true & first inventor of the invention, whose name is entered on the Patent Register as a Patentee

Expenditure for the invention must be incurred in India

Development means Expenditure

Resident Inventor (Patentee)

License/Permit to use patent/ Sharing of information about working of Patent/

Rendering any services related to Patent

Royalty Income will be Taxed at 10% on Gross Basis

Patent Developed and Registered in India

No Deduction

will be allowed for

any expenditure incurred to

earn Royalty

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100% Profits of Eligible Start-up Company derived fromEligible Business, will be deducted from Gross Total Income:

• For 3 consecutive Years, out of 5 years beginning from the year in which the Start-up is incorporated.

Conditions:

(i) The Start-up is not formed by splitting up, or thereconstruction, of a business already in existence:

(ii) The Start-up is not formed by the transfer to a newbusiness of machinery or plant previously used for anypurpose.

Company (Eligible Start-up)

Innovation, Development, Deployment or

commercialization of New Products, Processes or

Services driven by Technology or IP

Eligible Business

Profits related to Eligible Business

• Incorporated between 1st

April 2016 to 1st April 2019

• Total Turnover less than 25 Crores in FY 2016-17 to 2020-21

• Holds Eligibility Certificate from the Inter-Ministerial Board of Certification

New Section 80IAC (WEF 1st April 2017)

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New Section 54EE: Exemption from Capital Gains for anyTaxpayer, if the Long Term Capital Gain proceeds areinvested by the Taxpayer in Units of Specified StartupFund to be established by the Government.

Investment of whole or any part of Capital Gains in theUnits of Specified Startup Fund should be made within 6months from such transfer – Maximum Rs. 50 lakh

Quantum of exemption :-

• Cost of Asset > Capital Gains – Entire gains exempt• Cost of Asset < Capital Gains – (Entire Capital Gains) X

(Amount Invested/Entire gains)

If Units of Specified Startup Fund are transferred before 3years then

Capital gains exempt earlier will be chargeable to tax inyear of transfer of long-term specified asset

Taxpayer

Invests

Long Term Capital Asset

Units of Specified Startup Fund

Transfers

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Individuals or HUFs can sell Residential Property (a house ora plot of land) owned by them and use the saleconsideration to subscribe in the equity shares of a Start-upCompany.

Conditions:

• The Individual/ HUF selling the Residential Property mustown more than 50% share capital or voting rights aftersubscription in the shares of the Start-up Company.

• The Start-up Company has to use, with in 1 year from thedate of subscription in equity shares, the amount invested insuch shares, for purchase of New Asset, including Computersand Computer Software.

• Under the existing definition of “New Asset”, underSec. 54GB(6)(d) of the Income Tax Act, 1961, Plant &Machinery are included, but Computers and ComputerSoftware are excluded.

• So, the definition of New Asset is amended to specificallyinclude Computers and Computer Software.

Individual or HUF

Transfers

Residential Property

InvestsEligible Start-up

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WEF AY 2017-18, Income of Resident Individuals, HUFsor Firms, by way of Dividend in excess of Rs. 10 Lakhwill be taxed on gross basis at 10% in the hands of therecipients, without any:-

Deduction for any related expenses/allowances; Set-off of Losses

Applicability and Non Applicability

Recipient should be Individual, HUF and Firm(Resident in India)

The provision of tax on Dividend will not apply to aRecipient Non-Resident Individual, HUF and Firm(Not Resident in India) and a Recipient Domestic orForeign Company

Dividend Could be:-

Declared, Distributed or Paid by Domestic Company As per Section 2(22), excluding Section 2(22)(e)

Resident Individual/ Firm/ HUF

Domestic Company

Tax on Dividend > 10 Lakh

Domestic Companies will continue topay DDT at 20.358% (includingSurcharge of 12% & Education Cess)

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Domestic Company Shareholders

Unlisted Shares Buy-Back

Distributed Income

20% Buy-Back Distribution Tax

Old Provision:

20% Tax on Distribution of Income due to Buy-Back of Unlisted Shares (under Section 77A of Companies Act, 1956) by a Company [ Section 115QA]

New provision:

WEF 1st June 2016 any Buy-Back of Unlisted Shares by a Company in accordance with Company Law (any relevantprovision under Companies Act, 1956 or Companies Act 2013) will be subjected to 20% Buy-Back Distribution Tax. So, theNew Provisions of Section 115QA will apply to Buy-Back (of Unlisted Shares) under any Law relating to Companies.

Distributed Income = Consideration paid by company on buy-back – Amount which was received by the company for issue of shares (to be determined in prescribed manner)

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In his 2015 Budget Speech the FM had indicated that the rate of Corporate Tax will be reduced from 30% to 25% over next 4 years, in a phased manner, along with corresponding phasing out of Exemptions and Deductions.

This year, in Budget 2016, it has been proposed to phase out Exemptions & Deductions, as per the following guiding principles:

a) Profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate taxpayers.

b) The provisions having a sunset date will not be modified to advance the sunset date. Similarly the sunset dates provided in the Act will not be extended.

c) In case of tax incentives with no terminal date, a sunset date of 31.3.2017 will be provided either for commencement of the activity or for claim of benefit depending upon the structure of the relevant provisions of the Act.

d) There will be no weighted deduction with effect from 01.04.2017.

Proposed Phase out plan of Incentives (Profit linked Deduction/ Weighted deduction)

Section Existing Proposal

10AA: Special provisionin respect of newlyestablished units in SEZ

Profit linked deductions for units in SEZfor profit derived from export of articlesor things

No deduction shall be available to units commencing manufacture or production of article or thing or start providing services on or after 1st day April,2020. (from previous year 2020-21 onwards).

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35AC: Expenditure on eligible projects or schemes. Deduction for expenditure incurred by way of payment of any sum to a public sector company or a local authority or to an approved association or institution, etc. oncertain éligible social development project or a scheme

No deduction shall be availablewith effect from 1.4.2017 (i.e. from previous year 2017-18 andsubsequent years).

35CCD:Expenditure on skill development project. Weighted deduction of 150 per cent on any expenditure incurred (not being expenditure in the nature of cost of any land or building) on any notified skill development project by a company.

Deduction shall be restricted to100 per cent from 01.04.2020 (i.e.from previous year 2020-21onwards).

Section 80IA; 80IAB, and 80IB: Deduction in respect of profits derived from -a) development, operation and maintenance of an

infrastructure facility (80-IA)(b) development of special Economic zone (80-IAB)(c) production of mineral oil and natural

gas [80-IB(9)]

100 per cent profit linked deductions forspecified period on eligible businesscarried on by industrial undertakings orenterprises referred in section 80IA;80IAB, and 80IB.

No deduction shall be available ifthe specified activity commenceson or after 1st day April, 2017. (i.efrom previous year 2017-18 andsubsequent years).

Proposed Phase out plan of Incentives (Profit linked Deduction/ Weighted deduction)

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Section 32 read with rule 5 of Income-taxRules, 1962-AcceleratedDepreciation.

Accelerated depreciation is provided to certain Industrial sectors in order to Give impetus for investment. The Depreciation under the Income-tax Act is available up to 100% in respect of certain block of assets.

To amend the new Appendix IA read with rule 5 of Income-tax Rules, 1962 to provide that highest rate of depreciation under the Income-tax Act shall be restricted to 40% w.e.f 01.4.2017. (i.efrom previous year 2017-18 and subsequent years). The new rate is proposed to be made applicable to all the assets (whether oldor new) falling in the relevant block of assets.

35(1)(ii): Expenditure on scientific research.

Weighted deduction from the business income to the extent of 175 per cent of any sum paid to an approved scientific research association which has the object of undertaking scientific research. Similar deduction is also available if a sum is paidto an approved university, college or otherinstitution and if such sum is used for scientific research.

Weighted deduction shall be restricted to 150 per cent from01.04.2017 to 31.03.2020 (i.e. from previous year 2017-18 toprevious year 2019-20) and deduction shall be restricted to 100per cent from 01.04.2020 (i.e. from previous year 2020-21onwards).

35(1)(iia):Expenditure onscientific research.

Weighted deduction from the business income to the extent of 125 per cent of any sum paid ascontribution to an approved scientific research company.

Deduction shall be restricted to 100 per cent with effect from 01.04.2017 (i.e. from previous year 2017-18 and subsequent years).

Proposed Phase out plan of Incentives (Accelerated Depreciation/ Weighted Deduction)

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35(1)(iii):Expenditure on scientificresearch.

Weighted deduction from the business income to the extent of 125 per cent of contribution to an approved researchassociation or university or college or other institution to be used for research in social science or statistical research.

Deduction shall be restricted to 100 per cent with effect from 01.04.2017 (i.e. from previous year 2017-18 and subsequent years).

35(2AA):Expenditure on scientificresearch.

Weighted deduction from the business income to the extent of 200 per cent of any sum paid to a National Laboratory or a university or an Indian Institute of Technology or a specified person for the purpose of approved scientificresearch Programme.

Weighted deduction shall be restricted to 150 per cent with effect from 01.04.2017 to 31.03.2020 (i.e. fromprevious year 2017-18 to previous year 2019-20). Deduction shall be restricted to 100 per cent from 01.04.2020 (i.e. from previous year 2020-21 onwards).

35(2AB): Expenditureon scientific research.

Weighted deduction of 200 per cent of the expenditure (not being expenditure in the nature of cost of any land orbuilding) incurred by a company, engaged in the business ofbiotechnology or in the business of manufacture orproduction of any article or thing except some itemsappearing in the negative list specified in Schedule-XI, onscientific research on approved in-house research anddevelopment facility.

Weighted deduction shall be restricted to 150 per cent from 01.04.2017 to 31.03.2020 (i.e. from previous year2017-18 to previous year 2019-20). Deduction shall be restricted to 100 per cent from 01.04.2020 (i.e. from previous year 2020-21 onwards).


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35AD: Deduction inrespect of specifiedbusiness.

In case of a cold chain facility, warehousing facility for storage of agricultural produce, an affordable housing project, production of fertiliser and hospital weighted deduction of 150 per cent of capital expenditure (other than expenditure on land, goodwill andfinancial assets) is allowed.

In case of a cold chain facility, warehousing facility for storage of agricultural produce, hospital, an affordable housing project, production of fertilizer, deduction shall be restricted to 100 per cent of capital expenditure w.e.f. 01.4.2017 (i.e. from previous year2017-18 onwards).

35CCC: Expenditureon notifiedagricultural extensionproject.

Weighted deduction of 150 per cent of expenditure incurred on notified agricultural extension project.

Deduction shall be restricted to 100 per cent from 1.4.2017 (i.e from previous year 2017-18 onwards).


Note: Development, Operation and Maintenance of an infrastructure facility is now included in Section 35AD

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Spectrum Fee for purchase of Spectrum

Telecom Companies

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Amendment:

A new section 35ABA has been proposed to provide that:

• any Capital Expenditure incurred and actually paid by way of Spectrum Feewill be allowed as a deduction in equal installments, over the period forwhich the right to use spectrum remains in force.

Implications of Transfer of Spectrum

(i) where the spectrum is transferred and proceeds of the transfer are less thanthe expenditure (Spectrum Fee) remaining unallowed –• a deduction equal to the expenditure remaining unallowed as reduced by

the proceeds of transfer, shall be allowed in the previous year in which thespectrum has been transferred.

(ii) if the spectrum is transferred and proceeds of the transfer exceed theamount of expenditure (Spectrum Fee) remaining unallowed, the excessamount shall be chargeable to tax as profits and gains of business in theprevious year in which the spectrum has been transferred.

(iii) unallowed expenses in a case where a part of the spectrum is transferredwould be amortised.

(iv) if an Amalgamating Company sells or transfers the spectrum to anAmalgamated Company, being an Indian company, then the AmalgamatedCompany can amortise the spectrum in the same manner as the AmalgamatingCompany as if the later Company has not transferred the spectrum.

Issue:

• Whether Spectrum is an Intangible Asset,and whether Spectrum Fee paid toGovernment is eligible for Depreciationunder Section 32; Or

• Whether Spectrum Fee is “License” tooperate Telecom Business, and is thusentitled to Amortisation under Section35ABB?

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Section 50C:

Value adopted by Stamp Duty Valuation Authority isto be taken as Consideration for Computing CapitalGains on transfer of Land and Building

Issue:

If the seller enters into Agreement to sell the propertymuch before the Actual Date of Transfer (i.e.Conveyance), then the stamp Duty Valuation on theDate of Conveyance can be taken by the AO tocompute Capital Gains

Amendment:

Where the date of Sale Agreement and the date ofRegistration are not the same, the Stamp Duty Valueon the date of Agreement will be taken, to computethe consideration for Capital Gain purposes

Assessee TransfereeTransfer

Land/Building Land/building

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Present Section

Heads Existing Threshold Limit(Rs.)

Proposed ThresholdLimit (Rs.)

192A Payment of accumulated balance of Provident Fund due to an employee

30,000 50,000

194BB Winnings from Horse Race 5,000 10,000

194C Payments to Contractors Aggregate annual limit of 75,000

Aggregate annual limit of 1,00,000

194LA Payment of Compensation on acquisition of certain Immovable Property

2,00,000 2,50,000

194D Insurance commission 20,000 15,000

194G Commission on sale of lottery tickets 1,000 15,000

194H Commission or brokerage 5,000 15,000

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Present Section

Heads Existing Rates of TDS(%)

Proposed Rates of TDS (%)

194DA Payment in respect of Life Insurance Policy 2% 1%

194EE Payments in respect of NSS Deposits 20% 10%

194D Insurance commission Rate in force (10%) 5%

194G Commission on sale of lottery tickets 10% 5%

194H Commission or brokerage 10% 5%

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Resident Person

Non-Resident Person

India

Outside India

Current Position:

• Resident Indian has to withhold higher tax(20% TDS), on any sum or income or amounton which tax is deductible under ChapterXVIIB, if the Non-Resident recipient does nothave a PAN in India (Section 206AA)

Proposal:

• Section 206AA (20% TDS if no PAN) should notapply to a Non-Resident, or to a ForeignCompany, in respect of :-

Interest on long-term bonds as referred toin section 194LC

Any other payment,

subject to such conditions as may beprescribed.

What document will suffice In lieu of PAN willbe notified later.

Payment

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On Sale of a Motor Vehicle exceeding value of 10 Lakhs, theSeller must collect 1% Tax at Source (TCS), whether paymentby Purchaser is through Cash, Cheque, Draft or RTGS

On Cash Sales of Goods (Other than Bullion or Jewellery) &Cash Sale of Services, for more than 2 lakhs, the Seller mustcollect 1% TCS

Note: Cash sales of Bullion and Jewellery were already subjectto 1% TCS:

• Cash Sale of Bullion – Consideration > 2 Lakh• Cash Sale of Jewellery – Consideration > 5 Lakh

If Buyer/ Payer deducts TDS on payment ( say, for Services),then no TCS will be required

Seller

Domestic Company

• Motor Vehicle > 10 Lakh• Goods for Cash > 2 lakh• Services for Cash > 2 Lakh

TCS = 1% of Sale Consideration

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In his Budget Speech the Finance Minister announced –

‘I propose to rationalize theformula in Rule 8D governing such

quantification. The said Rule is beingamended to provide that disallowance

will be limited to 1% of the averagemonthly value of investments yielding exempt income, but not exceeding the

actual expenditure claimed.’

The amended Rule 8D is awaited

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Employers in all Sectors

New Employees

Manufacturers

• New Workmen should beemployed for 300 days in ayear

• There should be increase ofatleast 10% in number ofworkmen employed

New Workmen in Factory

Old Section 80JJAA: Incentive Available only to Manufacturing Sectors

Deduction of 30% wages paid to New Employees for 3 Assessment Years

New Section 80JJAA: Incentive Available to all Sectors

• New employee should beemployed for 240 days in a year

• Condition of atleast 10% increasein number of employees isremoved

• New employee’s emolumentsshould not be more thanRs. 25,000 per Month

Deduction of 30% wages paid to New Employees for 3 Assessment Years

In the first year of a New Business 30% of all Emoluments paid to Employees during the year will be allowed as deduction43

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Conditions:

i) The project is approved by the Competent Authority after1st June 2016, but on or before 31st March 2019

ii) The project is completed within 3 years from the date ofapproval by the Competent Authority - Certificate ofcompletion from the competent Authority is required

iii) The Built-Up area of shops & commercial establishment isless than 3% of the aggregate buildup area

iv) The project is on a plot of land measuring not less than –

1000 square metres where such project is locatedwithin the cities of Chennai, Delhi, Kolkata orMumbai or within the area of twenty-five kilometresfrom the municipal limits of these cities, or

2000 square metres within the jurisdiction of anyother municipality or cantonment board

Assessee

100% Deduction of profits

Developing & Building Housing Projects

Assessee executing the

housing project as a works

contractor is not eligible

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(v) the residential units comprised in the housing project do not exceed –

30 square metres where such project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within thearea of twenty-five kilometres from the municipal limits of these cities, or

60 square metres, where such project is located within the jurisdiction of any other municipality or cantonmentboard;

(vi) where a residential unit in the housing project is allotted to an individual, no other residential unit in the housingproject shall be allotted to the individual or the spouse or the minor children of such individual;

(vii) the project utilises—

a) not less than 90 % of the floor area ratio permissible in respect of the plot of land under the rules to be made by theCentral Government or the State Government or the local authority, as the case may be, where the project islocated within the cities of Chennai, Delhi, Kolkata or Mumbai or within the area of twenty-five kilometres from themunicipal limits of these cities, or

b) not less than 80 % of such floor area ratio where such project is located in any other area; and

(viii) the assessee maintains separate books of account in respect of the housing project.

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Consequences of Non-Completion of Project within the Statutory Time-Limit

If the housing project is not completed with in 3 years from the date of approval by the Competent Authority, then:

the Total Amount of deduction allowed - in one or more previous years - shall be taxed in the year in which theperiod for completion expires

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Assessee

Assessing Officer

Payment of 15% of

disputed Demand while

appeal is pending before

CIT(A)

Grant of Stay of Demand

The CBDT has issued office memorandum F.No.404/72/93-ITCC, Dated 29 February 2016, issuingguidelines to the Assessing Officer for Stay of Demand.

The Salient Features of the guidelines are highlighted inthe next Slide.

In his Budget Speech the Finance Minister (‘Mr. Arun Jatley’) stated that the Income Tax Department is issuing instructions making it mandatory for the Assessing Officer (‘AO’) to grant Stay of Demand once the Assessee pays 15% of the Disputed Demand, while the appeal is pending before

CIT (Appeals)

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Particulars Highlights

What new conditions have been put in place for stay of demand?

• The outstanding demand shall be disputed before CIT (A)• On payment of 15% of the disputed demand the AO shall grant stay of demand till disposal

of first appeal Subject to the two Exceptions listed below

Exception I – The AO can demand payment of a sum higher that 15%

If the AO is of the view that the nature of addition resulting in the disputed demand is suchthat payment of a lump sum amount higher than 15% is warranted (e.g. in a case whereaddition on the same issue has been confirmed by appellate authorities in earlier years or thedecision of the Supreme Court /or jurisdictional High Court is in favour of Revenue or additionis based on credible evidence collected in a search or survey operation, etc.) or,

Exception II – The AO can allow payment of a sum lower that 15%

If the AO is of the view that the nature of addition resulting in the disputed demand is suchthat payment of a lump sum amount lower than 15% is warranted (e.g. in a case whereaddition on the same issue has been deleted by appellate authorities in earlier years or thedecision of the Supreme Court or jurisdictional High Court is in favour of the assessee, etc.)

CBDT Office Memorandum F.No. 404/72/93-ITCC, Dated 29 February 2016

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What should the AO do in cases of Exception I or Exception II?

The AO should refer the matter to the administrative Pr. CIT/ CIT who, after considering all relevant facts, shall decide the proportion of demand to be paid by the assesse, as lump sum payment, for granting stay of the balance demand.

What should the assessee do if he is still aggrieved, despite the AO granting stay of demand, after payment of 15% of disputed tax?

The assessee can approach the jurisdictional administrative Pr. CIT/ CIT for a review ofthe decision of the AO.

Time limit for disposing of the stay application by AO

The AO shall dispose of the stay petition within 2 weeks of its filing.

Time Limit before Pr. CIT or CIT of disposing off AO’s reference application or assessee’s review application

AO’s reference application or assessee’s review application shall be disposed of by thePr. CIT/ CIT within 2 weeks of the AO making such reference, or the assessee filing suchreview, as the case may be.


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Conditions that the AO can impose for granting stay of demand

The AO may impose such conditions as he may think fit. He may, among other things -

• require an undertaking from the assessee that the assessee will cooperate in the early disposal of appeal failing which the stay order will be cancelled;

• reserve the right to review the order passed: after expiry of reasonable period (say 6 months), or if the assessee has not cooperated in the early disposal of appeal, or where a subsequent pronouncement by a higher appellate authority or court alters the

above situations;

• reserve the right to adjust refunds arising, if any, against the demand, to the extent of the amount required for granting stay.

Effective date The new guidelines for stay came into effect immediately from 29 February 2016


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Generation of Power

Generation of Power

Power Companies are now entitled to additional Depreciation

Existing Provision New Provision

Additional Depreciation

of 20% on New Plant

and Machinery

Generation &

Distribution of Power

Transmission of Power

Distribution of Power

Additional Depreciation

of 20% on New Plant

and Machinery

Section 32(1)(iia)Amended Section 32(1)(iia)

OR

OR

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Manufacturing Company

Installation

Existing Provisions:

Investment Allowance of 15% of the cost of New Plant &Machinery, to Manufacturing Companies if the cost of NewPlant & Machinery, acquired and installed during the year ismore than 25 Crores

New Provisions:

The Manufacturing Company can acquire the New Plant& Machinery during a year, and install it at any time in alater year ( but before 31st March 2017)

The Amended Provisions will apply from AY 2016-17i.e. FY 2015-16

Investment Allowance Under Section 32AC is nowavailable only for AY 2016-17 and AY 2017-18

Acquisition of New Plant and Machinery

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Issue (Under the Existing Provisions):

The acquisition and installation, both, have to be in the same year.

If a Manufacturing Company acquires New Plant and Machinery ( for Cost > 25 Crores) in a year but is not able to install it in the same year, then investment allowance of 15% is not available

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No carry forward of loss, unless loss return is filed in time Under

Section 139(3)

Specified Business Covered by Section

35AD

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Under Section 35AD, 100% deduction of CapitalExpenditure is allowed in respect of a SpecifiedBusiness (Cold Chain Facility, Cross-Country NaturalGas Pipeline, etc)

Loss from a Specified Business can be set-off onlyagainst another Specified Business

Carry Forward of Loss


Loss from Specified Business covered by Section 35ADis not subject to restriction of Section 139(3) i.e. filingof loss return in time.

So, carry forward of such loss is treated in a differentway than loss under other provisions

New Provisions:

Section 139(3) i.e. requirement to file loss return intime will now apply to carry forward of loss from aSpecified Business covered by Section 35AD

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Conversion of a ‘Private Company or UnlistedPublic Company’ into LLP is not regarded asTransfer for levy of Capital Gains if, among otherconditions –

• The Company’s Gross Receipts, Turnover orSales in any of Preceding 3 Years are notmore than 60 Lacs

LLPPRIVATE COMPANY conversion

New Provision:

For tax-neutral conversion, an additionalcondition is proposed to be imposed –

• The value of Total Assets in the books ofaccounts of the Company in any of thepreceding 3 years should not be more than 5crores

Whether conversion of a Company into LLP is a Transfer at all?

Regardless of these conditions, even at the outset, there is room to argue that such conversion is not a transfer, but is only a change in the form of business.

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• Late return can be filed withinone year from end of the A.Y.

• Late return cannot be revisedExisting Provision

• Late return can be filed before end of the A.Y.

• Late return can also be revisedNew Provision

Reduction in time to file Belated return

Belated return can also be revised

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Return of IncomeProcessing under Section

143(1)

Mandatory processing

before assessment


Processing of return of income under Sec. 143(1) is not necessary where Scrutiny Notice underSec.143(2) is issued.

On processing of return under Section 143(1) the Total Income shall be computed after makingadjustments for the following:

i. Any arithmetical error in the return; or

ii. An incorrect claim apparent from the return

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New Provisions:

A Return of Income must be processed before completion of assessment under section 143(3)

While processing the Return, adjustments for the following can also be made:

i. disallowance of loss claimed, if return of the previous year for which set off of loss is claimed wasfurnished beyond the due date specified under sub-section (1) of section 139;

ii. disallowance of expenditure indicated in the audit report but not taken into account in computing thetotal income in the return;

iii. disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or

iv. addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included incomputing the total income in the return

• No Adjustment can be made without giving an intimation to Taxpayer• Response received from Taxpayer must be considered before making any adjustment

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Notices either in Paper or Electronic

Form

Communication of Data & Documents through electronic

mode

• A Pilot Project was run in the year 2015-16 forE-Assessments

• Under that Project Taxpayers were notrequired to visit the Income Tax Office forAssessments

• In his Budget Speech the FM has announcedthat, in the coming years, the facility ofE-Assessments will be extended to allTaxpayers in 7 mega cities

• In that direction, in Budget 2016, followingchanges have been proposed:

Notices can be issued by the AO, either inPaper Form or in Electronic Form

The term “ Hearing” has been defined inSection 2(23C) to include communicationof data & documents through electronicmode

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AO Hearing

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Deadline to complete the Assessment is 2 years from the end of the A.Y.

Regular Assessment u/s 143(3)

Reopened Assessment u/s 147

Deadline to complete the Assessment is 1 year from the end of the F.Y. in which notice u/s 148 is served


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Deadline to complete the Assessment will be 21 months from the end of the A.Y.

Regular Assessment u/s 143(3)

New Provisions:

1st April 2014

AY 2014-15 (Assessment Pending on 01/06/2016)

31st March 201521 months

31st December 2016(Revised Deadline)

Example:

Deadline pre-poned from 31st March to 31st December

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Reopened Assessment u/s 147

Deadline to complete the Assessment will be 9 monthsfrom the end of the financial year in which noticeu/s 148 is served

New Provisions (Continued):

1st April 2015

Notice u/s 148 served in FY 2015-16

31st March 201621 months

31st December 2016(Revised Deadline)

Example:

Deadline pre-poned from 31st March to 31st December

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Assessee

A.O.

Refund


Interest on Refund of prepaid taxes is paid only if the Refund arises outof excess payment of Advance Tax, TDS or TCS

No Interest is paid if the Refund arises out of excess payment ofSelf-Assessment tax

Period for which Interest is paid:

From 1st April of Assessment Year to the date on which Refund is granted

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Assessee

A.O.

Refund

New Provisions:

Interest on Refund of prepaid taxes will be paid even if the Refund arises out of excess payment of Self-Assessment Tax

Period for which Interest will be paid:

If Return of Income is filed after the due date, then –

o Interest-Period will begin from the date of filing the return (instead of1st April of the Assessment year)

If the Refund is out of the excess Self-Assessment Tax, then –

o Interest-Period will begin from the date of payment of such tax, ordate of filing of Return, whichever is later

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Assessee

A.O.

Refund

Order of Adjustment:

[Stated in Memorandum, but not reflected in the Finance Bill]

To determine the nature of Tax refunded, the below Order of Adjustment will be followed:

i. TDS, TCS and Advance tax will be adjusted first

ii. Self Assessment Tax will be adjusted later

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Assessee

Appeal Effect/Effect to Revision Orders

• Appeal/Revision Effect must be given within 3 months

• Otherwise 3% additional interest on Refund

New Provisions:

New Time Limit (under New Sec. 153 (5)) to give effect to Appellate Ordersof CIT (A), ITAT, High Court and Supreme Court; and also to give effect toRevision Orders (under Sec. 263 and 264) of CIT –

3 months from the end of the month in which the CIT receives the Appellate Order; or

3 months from the end of the month in which the CIT passes Revision Order under Sec. 263/264

CIT may extend the above period by additional 6 months

If refund arising due to Appeal Effect or Revision Effect is not granted withinthe above-mentioned time-limit, then additional interest of 3% is to bepaid from –

The date of expiry of the period to give Appeal Effect/Revision Effect to the date of grant of Refund

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50% Penalty of Tax Payable

Under-Reporting of Income

New Penalty Provisions

In New Penalty Provisions in Section 270A there will betwo categories of penalties -

i) 50% of Tax payable on Under-Reported income, and

ii) 200% of Tax Payable on Mis-Reported income

Mis-Reporting of Income

200% Penalty of Tax Payable

A Taxpayer shall be considered to have Under-Reported hisIncome if –

(a) the income assessed is greater than the incomedetermined in the return processed under Sec. 143(1)(a);

(b) the income assessed is greater than the maximumamount not chargeable to tax, where no return of incomehas been furnished;

(c) the income re-assessed is greater than the incomeassessed or reassessed immediately before suchre- assessment;

(d) the amount of deemed total income assessed orreassessed under MAT is greater than the deemed totalincome determined in the return processed underSec. 143(1)(a);

(e) the amount of deemed total income assessed under MATis greater than the maximum amount not chargeable to tax,where no return of income has been filed;

(f) the income assessed or reassessed has the effect of

reducing the loss or converting such loss into income.78

Penalty for Mis-Reporting of Income

A Taxpayer shall be considered to have Mis-Reported his income if there is:

i) misrepresentation or suppression of facts;

ii) non-recording of investments in books of account;

iii) claiming of expenditure not substantiated by evidence;

iv) recording of false entry in books of account;

v) failure to record any receipt in books of account having a bearing on total income;

vi) failure to report any international transaction or deemed international transaction under Chapter X.

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New Section 270AA to be inserted in the Income Tax Act 1961

For immunity from Penalty (imposable under the New Penalty Provisions of Sec.270A), and Prosecution (under Sec.276C):

Taxpayer has to pay the Tax + Interest mentioned in the Demand Notice, within the time allowed in such Notice, and

Taxpayer should not file any appeal before the CIT (Appeals)

Immunity from Penalty

Pay Demand in Time + Do not file Appeal

Assessment Order

Demand Notice

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Exception:

Immunity will not be available if Penalty (under New Sec. 207A) is initiated due to Mis-Reporting of income, on account of the following -

i. misrepresentation or suppression of facts;

ii. failure to record investments in the books of account;

iii. claim of expenditure not substantiated by any evidence;

iv. recording of any false entry in the books of account;

v. failure to record any receipt in books of account having a bearing on total income; or

vi. failure to report any international transaction or any deemed international transaction or any specified domestictransaction to which Transfer Pricing provisions of Chapter X apply.

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Procedure: Assessment Order

Application to AO for Immunity

File Application within 1 month from the end of the month in which Assessment order is received

Order by AO, accepting or rejecting the Application(opportunity of being heard to be given by the AO)

AO must pass Order within 1 month from the end of the month in which the application is received by the AO

Application is rejected

Application is accepted

Appeal to CIT(A), against the Assessment Order

Matter reaches Finality

No Appeal against Rejection of Application

Time limit extended to enable filing of Appeal

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Taxpayer

Tax Arrear refers to the amount of Tax, Interest or Penaltydetermined under the Income-tax Act or the Wealth-tax Act,1957 in respect of which Appeal is pending before the CIT(Appeals) or the CWT (Appeals) as on the 29th February, 2016.

An option to settle dispute is provided to Taxpayers whohave disputed Income-Tax or Wealth-Tax Assessment, orPenalty, in First Appeal

Scheme (WEF 1st June 2016):

1) Taxpayer has to file a “declaration” in respect of theTax Arrear, which is in dispute as on 29th February2016

2) Any appeal before CIT(A) or CWT (A) must bewithdrawn before filing the declaration

3) On filing of a valid declaration, the Designated CITwill determine, the Amount Payable

4) Then, the tax must be paid within 30 days

5) Amount Payable –

• Disputed Tax upto 10 Lacs: Tax at the applicable rateplus Interest upto the Date of Assessment

• Disputed Tax more than 10 Lacs: Tax at theapplicable rate plus Interest upto the Date ofAssessment plus Penalty of 25% of the ‘MinimumPenalty that can be levied’

• If pending Appeal is against Penalty, then 25% of the‘Minimum Penalty that can be levied’

The Taxpayer (the Declarant) will get immunity from Prosecution

Tax Arrear

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Ineligible Cases:

It is proposed that following cases shall not be eligible for the scheme -

Cases where Prosecution has been initiated before 29.02.2016.

Search or Survey cases.

Cases relating to Undisclosed Foreign Income and Assets.

Cases based on information received under Double Taxation Avoidance Agreement (DTAA) .

Persons notified under Special Courts Act, 1992.

Cases covered under Narcotic Drugs and Psychotropic Substances Act, Indian Penal Code, Prevention ofCorruption Act or Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

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Assessee

Undisclosed Income

• Declare Undisclosed Income of prior years

• Pay 45 % (Tax 30% + Surcharge 25% + Penalty 25%)

An opportunity is proposed to be provided to persons whohave not paid full taxes in the past to come forward anddeclare the Undisclosed Income of any prior financial yearsupto 2015-16.

The scheme is proposed to be brought into effect from 1stJune 2016 and will remain open up to the date to benotified by the Central Government

In his Budget Speech the FM indicated that the Schemewill remain open from 1st June 2016 to 30 September2016

Tax will be charged at the rate of 30% on the declaredincome as increased by Surcharge at the rate of 25% of taxpayable (to be called the Krishi Kalyan cess).

A penalty at the rate of 25% of tax payable is alsoproposed to be levied on undisclosed income declaredunder the scheme.

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Key Features of the Scheme

Declarations made under the scheme shall be exempt from wealth-tax in respect of assets specified in declaration.

No scrutiny and enquiry under the Income-tax Act and Wealth-tax Act will be undertaken

Immunity from prosecution will also be provided.

Immunity from the Benami Transactions (Prohibition) Act, 1988 is also proposed

Under the Scheme no benefit, no concession and no immunity, shall be conferred, on any person other than theperson making the declaration.

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Ineligible Cases:

It is proposed that following cases shall not be eligible for the scheme -

where Notices have been issued under section 142(1) or 143(2) or 148 or 153A or 153C

where a Search or Survey has been conducted and the time for issuance of notice under the relevant provisions ofthe Act has not expired

where Information regarding the Undisclosed Income is received under an Agreement with Foreign Countries

cases covered under the Black Money Act, 2015

persons notified under Special Court Act, 1992

cases covered under Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the UnlawfulActivities (Prevention) Act, 1967, the Prevention of Corruption Act, 1988.

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Nilesh Patel - CPA (USA), Ex-Addl CIT (Former IRS Officer)

M:+919819060323 E: [email protected] W: www.taxwize.in

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Budget 2016 Presentation - Part II (Domestic Corporate Direct Tax)

Economy & Finance