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DVS Research Foundation (DRF) is the CSR initiative of DVS Advisors LLP. DRF was set up as a virtual foundation for intellectual interactions and has more than 1600 members from 20+ countries. Our members span across diverse professional backgrounds including Academicians, Chartered Accountants, Lawyers, Bankers, Business owners (across sizes), Bureaucrats and Public representatives. Since inception we have conducted more than 300 programs on topics from Constitution, Economy, Taxation, Banking, Legal, Public policy and Global finance to name a few.

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India Budget Series

TAXATION OF BUY BACK OF SHARES

It is proposed to amend Section 115QA to provide for:

-taxation of distributed income in case of buy back of shares by an unlisted company under any law relating to companies (currently it refers to only Companies Act 1956) and

-providing clarity on the method of determination of consideration received by the company at the time of issue of shares (including cases where shares are allotted for consideration other than cash)

Hence, buyback transactions, where the original allotments were made for consideration other than shares, like sweat equity, merger consideration, etc. would possibly be covered under this proposed rules.

The amendment is effective from 1st June 2016

India Budget Series

AMORTISATION OF SPECTRUM FEE FOR PURCHASE OF SPECTRUM

Territory of India is not limited to land and sea but it includes air as well. There is a levy of Spectrum fee for auction of air waves. There are uncertainties in tax treatments in relation to payments in respect of Spectrum.

In order to provide clarity and avoid any future litigation and controversy, it is proposed to insert a new Section 35ABA in the Act to provide for tax treatment of spectrum fee.

The proposed new Section 35ABA shall function on same lining as that of Section 35ABB which is in relation to “license to operate telecommunication business”, in respect of:-

-Deduction of capital expenditure

-Taxability at the time of transfer of spectrum

-Taxability of excess amount and ineligible expenses at the time of transfer

– A scheme of amalgamation

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

India Budget Series

TAXATION OF NON-COMPETE FEES AND EXCLUSIVITY RIGHTS IN CASE OF PROFESSION

Under the existing provisions of the Income Tax Act, there are provisions in relation to taxation of non-compete fees and exclusivity rights in relation to Business but there are no such provisions in relation to Profession.

Thus, it is proposed to make the following considerations:-

-Non-compete fees received/receivable, recurring in nature, in relation to not carrying out profession shall be taxed as “Profits and Gains of Profession”

-Capital receipts on transfer of rights to carry profession, shall be taxable under the head “Capital Gains” and not as “Profits and Gains of Profession”

-Further, the cost of acquisition and cost of improvement for calculating capital gains on account of transfer of rights to carry profession, shall be taken as ‘nil’

Non-compete fees in case of business shall be taxed as business income and not as capital gains.

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

India Budget Series

EXTENSION OF SCOPE OF SECTION 43B

With a view to ensure the prompt payment of dues to Railways for use of the Railway assets, it is proposed to amend Section 43B so as to expand its scope to include payments made to Indian Railways for use of Railway assets.

Thus, payments made to Indian Railways, for use of Railway assets, shall be allowed as deduction only if the same is paid on or before the due date of filing of return.

This amendment will come into effect from assessment year 2017-18 and for subsequent assessment years.

India Budget Series

RATIONALISATION OF SCOPE OF TAX INCENTIVE UNDER SECTION 32AC

The existing provision of Section 32AC(1A) provides for an investment allowance at the rate of 15% for purchase of new plant and machinery exceeding Rs.25 crores by a company engaged in manufacturing or production of any article provided that acquisition and installation of the said plant and machinery is done in the same previous year.

As the benefit under this Section is available upto 31.03.2017, it is proposed to amend the said Section to eliminate the dual condition of acquisition and installation in the same previous year and it is further proposed that benefit shall be allowed in the year when new plant and machinery is installed in case where the year of installation is other than year of acquisition.

For example, if a company acquires new plant and machinery on 01.03.2016 for Rs.30 crores and the same is installed on 30.04.2016, as per the existing provisions, the deduction of investment allowance at the rate of 15% shall not be allowed as the said plant and machinery are not acquired and installed in the same previous year. However, as per the amendment, the investment allowance of Rs.4.5 crores (15% of 30 crores) shall now be available to the Company for the year ended 31.03.2017.

This amendment was inserted due to the practical difficulty of commissioning plants as the quantum is above Rs.25 crores. Hence the conditions have been liberalised with greater focus on the intention of promoting the Make in India campaign.

This amendment will take effect retrospectively from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and 2017-18.

India Budget Series

DEDUCTION IN RESPECT OF BAD AND DOUBTFUL DEBTS IN CASE OF NBFCS

The existing provisions of Section 36(1) (viia) allows for a deduction of maximum 5% of the Gross Total Income (before claiming deduction under this clause and chapter VI-A) in respect of provision for bad and doubtful debts for a Public Financial Institution, State Financial Corporation and State Industrial Investment Corporations.

It is proposed to extend this benefit to Non-Banking Financial Companies (“NBFCs”) as well.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years

India Budget Series

INCREASE IN THRESHOLD LIMIT OF PRESUMPTIVE TAXATION SCHEME FOR PERSONS HAVING BUSINESS INCOME

The existing provision of Section 44AD states that eligible businesses having gross receipts not exceeding Rs.1 crore shall be presumed to have an income equal to 8% of the gross receipts.

It is proposed to increase this limit for presumptive taxation from Rs.1 crore to Rs.2 crores.
It is further proposed that expenditure in the nature of salary, remuneration, interest, etc. paid to a partner under Section 40(b), which were erstwhile allowed as deduction, shall now not be admissible while computing income under this section.

For example, say the gross receipts of a firm, opting for presumptive taxation scheme, is Rs.70 lakhs for A Y 2017-18 and the remuneration paid to partners is Rs.2 lakhs. The taxability under current provisions and proposed provisions shall be as follows:-


Particulars
Present

(in Lakhs)

Proposed

(in Lakhs)

Gross Receipts 70 70
Presumptive Taxation @ 8% 5.6 5.6
Less : Remuneration paid to partners 2 0
Net Income 3.6 5.6
Tax @ 30% 1.08 1.68
Add : Cess @ 3% 0.03 0.05
Total Tax Payable 1.11 1.73

It is also proposed that eligible businesses that declare profits in cognizance with Section 44AD as per presumptive taxation scheme and further, have not declared profits in line with the presumptive taxation scheme for any of 5 consecutive assessment year, such assesses shall not be eligible to claim the benefit under this Section for next 5 assessment years from the year of such deviation.

An illustrative example has been tabulated below:

Assessment Year Gross Receipts (in Rs.) Income (in Rs.)
2017-18 1,00,00,000 8,00,000
2018-19 90,00,000 7,20,000
2019-20 1,00,00,000 8,00,000
2020-21 80,00,000 6,40,000
2021-22 1,00,00,000 4,00,000
2022-23 Not eligible to claim benefit under Section 44AD
2023-24
2024-25
2025-26
2026-27

It is also proposed that the eligible assessees, opting for presumptive taxation scheme, may pay advance tax on or before 15th March of the relevant previous year.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years.

India Budget Series

INCREASE IN THRESHOLD LIMIT FOR AUDIT OF PROFESSIONALS

The existing provision of Section 44AB provides for compulsory audit for professionals whose gross receipts exceed Rs.25 lakhs.

It is proposed to amend the said Section and raise the audit limit from Rs.25 lakhs to Rs.50 lakhs.

The increase in threshold for audit of businesses has not been increased from 100 lakhs to 200 lakhs to keep it in tune with the revision of limits in 44AD. This may give rise to a case where corporate assesses would be subject to tax audit if the turnover exceeds Rs 100 lakhs.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years.

India Budget Series

INTRODUCTION OF PRESUMPTIVE TAXATION SCHEME FOR PROFESSIONALS

The existing provisions of presumptive taxation do not include professionals within their ambit.

It is proposed to include professionals under the net of presumptive taxation by inserting a new Section 44ADA, which contains the following:-

The presumptive taxation scheme shall apply to professionals such as legal, medical, engineering, architecture, accountancy, technical consultancy or interior decoration or any other profession notified in the Official Gazette

The gross receipts from profession shall not exceed Rs. 50 lakhs

The presumptive rate of taxation shall be 50% of the total gross receipts or a sum higher than the presumptive profit, actually earned by the professional unless otherwise, the net profit offered is less than the profit at presumptive rate of taxation and the same is higher than the basic exemption limit.

The scheme shall apply to residents who are individual, HUF or partnership firm but not Limited Liability Partnership firm

The professional shall be deemed to have been allowed all deductions from Section 30 to Section 38 and the WDV of any asset shall be calculated as if the depreciation has been actually allowed for relevant assessment years. Books of accounts need not be maintained by the professional and audited if opted for presumptive taxation scheme, unless otherwise, the net profit offered is less than the profit at presumptive rate of taxation and the same is higher than the basic exemption limit

The deduction for partner’s remuneration is not made available in this section though it has not been expressly stated in the memorandum

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years.

India Budget Series

TAXATION OF INCOME FROM PATENTS

With the intent to ensure parity with the global tax regime and in due regard of guidelines issued by the OECD’s BEPS (Base Erosion Profit Shifting) Project, it is proposed to provide a concessional tax regime for eligible assesses engaged in patents and patented products.

In this context, it is proposed that in case of eligible assessee earning royalty income in respect of patents developed and registered in India, the same shall be taxed at the rate of 10% (plus surcharge and cess) on the gross amount of royalty.

It is further proposed that no expenditure or allowance in respect of such royalty income shall be allowed under the Act.

Eligible assessee means a person resident in India, who is first and true inventor of the invention and a patentee, whose patent is registered as per Patents Act, 1970.

Royalty income shall include any consideration received for –

– Transfer of rights of a patent, or

– Imparting information concerning working of, or the use of a patent, or

– Use of any patent, or

– Rendering any services in connection with clauses (i) to (iii).

 

However without serious improvements in the Patent Registration laws, there is minimal incentive for any person to register and receive IP incomes from India.

 

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

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