|
Direct Tax Vista Your weekly Direct Tax recap Edn. 43 – 30th January 2023 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP |
|
Budget 2023 – Balancing Fiscal Health and GDP Growth: It is expected that The budget 2023 should take the route of increasing in funding towards capital expenditure and rural areas within the constraints of the fiscal deficit management, thus taking a balanced approach towards fiscal consolidation and economic growth. The expected proposals in Duties and Taxation are outlined in this DTV Edition as follows-
Expected Impact of Budget 2023 on Personal Tax: There are more than 80 million taxpayers in India, and salaried employees are the biggest contributors to taxes, in India. The following are the expectations on the personal Tax space from the FM -
1. Changes in Valuation u/s 17(2) of Company Owned Accommodation – The taxable value of residential accommodation owned by a company and provided to its employees is taken @ 15%/10%/7.5% of “Salary” in cities having different levels of population. Hence, the same employee staying in the same company owned accommodation, the perquisite value will increase with every salary increase. This is a demotivating factor for employees and hence it is suggested that in case of company owned accommodation, the concept of fair value should be introduced for the purpose of determining perquisite value, so as to ensure that the employee is taxed on the right value of this perquisite. Fair Value should be defined as the comparable rent in the location concerned.
2. Leave Travel Concession/Assistance u/s 10(5) - Tax relief may be granted annually and should include both domestic and foreign travel, to give a fillip to the Travel and Tourism Industry. Tax relief should be extended to cover even accommodation expenses apart from travel costs.
3. Exemption from tax for payment of Leave Encashment to be raised to Rs.10 lakhs - The exemption limit for payment of leave encashment u/s 10(10AA) of the Act is only Rs. 3 lakhs from last 21 years and needs to be raised substantially with immediate effect.
4. Contribution to National Pension Scheme (NPS) - At present the voluntary contribution of Rs 50,000 is allowed as a deduction u/s 80CCD(1B) of the Act. It should be raised to atleast Rs. 1 Lakhs.
5. Rationalization of tax rate for income of dividend earned by residents - With the abolition of Dividend Distribution Tax (DDT) by Finance Act 2020, dividend is now taxed in the hands of shareholders at applicable slab rate. Accordingly the Dividend tax could go upto 43% for residents, which for non-residents is only 28.5%. Like NRIs, for residents also dividends may now be taxed at a lower rate.
6. The high personal tax rate for individuals in India stands out as an exceptionally high rate as compared to other countries. For example, the maximum rates of personal income in Hongkong is 15%, Sri Lanka – 18%, Bangladesh – 25% & Singapore – 22%. Salaried class and the middle class bear the highest brunt of high income tax.
Further, the highest marginal rate for individuals has now gone up to 43% approx (highest slab). As compared to corporates where it is 29% approx. Equity requires that there should be some parity atleast on the same. This budget may see the finance minister do the following –
a. Increasing the basic income tax exemption limit from Rs 2.5 lakh for individual taxpayers to Rs 3.5 Lakh,
b. Enhancing the standard deduction of Rs 50,000 to around Rs 75,000, rendering some tax relief to the country’s middle-class population.
7. Despite the introduction of a new tax system, the majority of taxpayers have not adopted it since it is less viable than the previous system. Hence it is expected that a new ‘hybrid system’ combining the new and old scheme would be introduced and the highest slab of income tax of 30% which starts at Rs.10 Lakhs could also be enhanced to atleast Rs. 15 Lakhs.
8. Further, The Finance (No.2) Act, 2014 had fixed an overall limit to Rs.1.5 lakhs in respect of deduction under section 80C of the Act. Even if we consider an inflation of 6% per annum, the deduction Needs to increase to atleast Rs.2.5 Lakhs. These reliefs would incentivise savings and investments too.
9. With rising healthcare costs, compounded by rising inflation concerns impacting household incomes, increase in rebate on medical and health insurance u/s 80D is the next big ask among the consumers. The limit now is Rs.50000 for non-senior citizens and Rs.1 lakhs for senior citizens. It is expected to increase by 50% atleast.
10. Further, the deduction limit for interest on housing loan is around Rs 2 lakhs. With the rise in Interest rates, it is expected that the limit should also be increased to at least Rs.3 Lakhs.
1. Decriminalization and Compounding -
A. Decriminalization under GST: The 48th GST Council Meeting had recommended to - raise the minimum threshold of tax amount for launching prosecution under GST from Rs. 1 Crore to Rs. 2 Crores, except for the offence of issuance of invoices without supply of goods or services or both;
B. decriminalize certain offences specified under clause (g), (j) and (k) of sub-section (1) of section 132 of CGST Act, 2017, viz.-
- obstruction or preventing any officer in discharge of his duties;
- deliberate tempering of material evidence;
- failure to supply the information.
C. reduce the compounding amount from the present range of 50% to 150% of tax amount to the range of 25% to 100%;
Expectations from Budget 2023 -
There are 12 offences under Section 132(1) of The CGST Act 2017. Out of these certain offenses are non-bailable and others are bailable after they are cross certain threshold. These actions would be considered as offences if the tax alleged to be evaded is Rs. 1 Crore and above. Now this threshold in Budget 2023 is set to be increased to Rs.2 Crore. However, the offence of “issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax” as per Section 132(1)(b) would still continue with a lower threshold of Rs.1 Crore only.
Further 3 offenses may go off this list as follows as these were subject to varied interpretations by field officers –
(g) obstructs or prevents any officer in the discharge of his duties under this Act – It is easy to allege but difficult to prove
(j) tampers with or destroys any material evidence or documents – again it can be easily alleged
(k) fails to supply any information which he is required to supply under this Act or the rules made thereunder or (unless with a reasonable belief, the burden of proving which shall be upon him, that the information supplied by him is true) supplies false information; - Even filmsy non-supply of information could have been alleged under this clause and criminal action could be taken. Say for example, even if the purchase register of 1 month out of 1 year could not be provided, then this clause could be invoked and criminal prosecution could be launched. Hence to eliminate the subjectivity, this offense seems to be decriminalised.
2. Third Country Exports, High Seas Sale and Bond Sale to be non taxable w.e.f. 1.7.2017 - Paras 7, 8(a) and 8(b) were inserted in Schedule III of CGST Act, 2017 with effect from 01.02.2019 to keep certain transactions/ activities, such as supplies of goods from a place outside the taxable territory to another place outside the taxable territory, high sea sales and supply of warehoused goods before their home clearance, outside the purview of GST. In order to remove the doubts and ambiguities regarding taxability of such transactions/ activities during the period 01.07.2017 to 31.01.2019, the Council has recommended to make the said paras effective from 01.07.2017. However, no refund of tax paid shall be available in cases where any tax has already been paid in respect of such transactions/ activities during the period 01.07.2017 to 31.01.2019.
Expectations from Budget 2023 -
Field officers were raising doubts on whether these transactions were within purview of GST before 1st Feb 2019, but now in this Budget an explanation may be added for retrospective effect of these provisions from 1st July 2017. Hence it will be clear that Third Country Exports, High Seas Sale and Bond Sale would be non-taxable w.e.f. 1.7.2017.
It is pertinent to note that no ITC reversal shall also be required as per Section 17(3) in these cases.
3. Facilitate e-commerce for micro enterprises: GST Council in its 47th meeting had granted in-principle approval for allowing unregistered suppliers and composition taxpayers to make intra-state supply of goods through E-Commerce Operators (ECOs), subject to certain conditions. The Council approved the amendments in the GST Act and GST Rules, along with issuance of relevant notifications, to enable the same. Further, considering the time required for development of the requisite functionality on the portal as well as for providing sufficient time for preparedness by the ECOs, Council has recommended that the scheme may be implemented w.e.f. 01.10.2023.
Expectations from Budget 2023 -
There would be consequent amendments in the act to allow unregistered suppliers and composition taxpayers to make intra-state supply of goods through E-Commerce Operators (ECOs), subject to certain conditions w.e.f. 01.10.2023.
4. Place of Supply for “Outbound Freight/ Courier/ Mail” Charges -
A Circular has already been issued for clarifying the issues pertaining to the place of supply of services of transportation of goods in terms of the proviso to sub-section (8) of section 12 of the IGST Act, 2017 and availability of input tax credit to the recipient of such supply.
It has also been recommended that proviso to sub-section (8) of section 12 of the IGST Act, 2017 may be omitted by the budget 2023
Expectations from Budget 2023 -
Section 12(8) states as under –
“(8) The place of supply of services by way of transportation of goods, including by mail or courier to,––
(a) a registered person, shall be the location of such person;
(b) a person other than a registered person, shall be the location at which such goods are handed over for their transportation.
[Provided that where the transportation of goods is to a place outside India, the place of supply shall be the place of destination of such goods.]”
On 30-9-2022, exemption have seen sunsets leaving the services i.e., outbound ocean freight taxable @5% subject to the condition that ITC on goods (other than on ships, vessels including bulk carriers and tankers) has not been taken.
In Section 12(8) on POS, a proviso has been inserted w.e.f. 1-2-2019 vide amendment in IGST Amendment Act, 2018 in case of outbound freight services where both transporter and exporter is in India which states that where the transportation of goods is to a place outside India, the POS shall be place of destination of goods. Since the POS is outside India, as per section 7(5)(a) it shall be treated as interstate supply and hence, IGST is to be levied.
From the perspective of exporters who are exporting on C.I.F. basis by availing services from domestic transporter, IGST needs to be paid and can be claimed as ITC and refunds thereof. However, the dilemma which arises is that the place of supply in the instant case would have to be selected as “foreign territory” (code 96) or “other territory” (code 97) whereas the recipient’s location would not be “foreign/other territory”. Though there is no explicit bar on the recipient availing credits of IGST paid under the provisions of the GST laws if the place of supply is not shown as the recipient’s State yet challenges may have arisen in taking ITC as the POS in such cases was not the recipient’s State.
It has been clarified by Circular that where POS is “foreign territory” (code 96), ITC is available, yet no clarification is there where POS of “other territory” (code 97) has been selected. This still remains a grey area.
This whole anomaly is expected to be corrected by proposing to remove the proviso to section 12(8) of the IGST Act, 2017 restoring the POS as the location of the registered recipient to iron out the issue.
5. Section 37, 39, 44 and 52 of CGST Act, 2017 to be amended to restrict filing of returns/ statements to a maximum period of 3 years from the due date of filing of the relevant return / statement.
6. Amendment in definition of “non-taxable online recipient” under section 2(16) of IGST Act, 2017 and definition of “Online Information and Database Access or Retrieval Services (OIDAR)” under section 2(17) of IGST Act, 2017 so as to reduce interpretation issues and litigation on taxation of OIDAR Services.
7. GST Tribunals: The formation of “GST Tribunals”, something which is now of critical importance, may have to wait further as there is a discussion on the structure of the Tribunals, whether they would be State level vs National GSTAT.
1. Import duties of ‘non-essential imports’: As regards foreign trade, the Government may hike the import duties of ‘non-essential imports’ like aviation equipment, high end electronics, steel industry items, plastics, leather and jewellery. This could improve local production of these items and also help in improving the trade balance. However, raw material import duty could see a reduction.
2. RoDTEP Scheme: On the exports side, RoDTEP Scheme, which has replaced the MEIS Scheme could see increased allocation over and above the 40000 Cr in the past. It might be worthwhile to note that already the RoDTEP Rate on ‘Tea’ has been increased recently.
3. Legacy Dispute Settlement Scheme in Customs for further improving India’s Ease of Doing Business Ranking: The Import and Export Compliances under The Customs Act 1962 have undergone a dramatic changes in the past 3 years. Faceless Assessments under Customs have also improved India’s Worldwide ranking in Ease of Doing Business. It is expected that these changes will reduce disputes going forward and ease the pressure of Litigation under Customs. However, there are significant legacy matters under Customs which have accumulated over the years relating to Classification, valuation, etc. Such disputes should be settled as we enter into an era of NO VIVAAD and ONLY VISHWAS between the businesses and The Government. The Sabka Vishwas dispute settlement scheme for historical indirect tax levies like central excise and service tax as well as Vivaad Se Vishwas Scheme for Direct Tax have elicited an overwhelming response from businesses. Now businesses are hoping for an amnesty scheme under customs as well, essentially to ensure certainty on potential financial impacts on pending disputes, and to help business monetise the probable recoveries on impending litigations and bridge the fiscal deficit.
A dispute resolution scheme under customs should also garner appreciation, especially from global businesses that have set up operations in India by outsourcing their manufacturing processes, for promoting the “Make in India” campaign.
4. DESH Bill: With a view to overhauling the existing Special Economic Zone (SEZ) law of 2005, the government proposed reforms in the DESH Bill to revive interest in SEZs and develop more inclusive economic hubs. It is expected that the government should expedite the introduction of the DESH bill.
1. Tax Deduction at Source under section 194R of the Act and Section 28(iv) of Income from Business/Profession – It recommended to suitably clarify in Circular 12 that the discounts granted would not come within the ambit Section 28(iv). Parallelly it is recommended to clarify in Circular 12 that ‘discounts’ include ‘pre-sale discount’ and ‘post-sale discount’. Further, It should be clarified that write off of bad debts is not a benefit or perquisite within the provisions of Section 194R since the requirement to deduct TDS u/s. 194R will add to the cost of the corporate creditor who has already suffered a loss due to the write off of bad/unrealized debt.
2. Deduction in respect of Expenditure on Brand Building & R&D – It is expected that the Budget should provide tax incentives to Indian companies in form of weighted deduction on brand building expenditure incurred by them. For example, since foreign brands entail a royalty outflow, a similar percentage, say, 5% to 8% of turnover of Indian brands should be allowed as a ‘standard deduction’ to eligible companies, even if they have opted for concessional tax regime under Section 115BAA or 115BAB of the Income Tax Act, 1961.
3. Requirement to issue and maintain tax deducted at source (‘TDS’) and Tax collected (‘TCS’) certificates: The CBDT may Consider removing the requirement for payers to issue TDS/TCS certificates and consider prescribing Form 26AS (generated through secure safeguards to ensure payee information is not allowed to be tampered with) as the basis for tax authorities to grant tax credit.
4. Time limit for disposal of appeals by Commissioner of Income Tax (Appeals) [CIT(A)]. Time limit for disposal of remand report sought by CIT(A) by the Assessing Officer (AO) - Delay in disposal of appeal and resulting pending litigation is against the professed policy of “Ease of Doing Business” of the Government. It is therefore expected that statutory timelines be prescribed for disposal of the appeals by CIT(A). Further, timelines should also be specified for disposal of remand report by the AO.
(The author is a CA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Lead - Indirect Tax Core Group of CII- ER and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)