Section 80C of the Income-tax Act provides for a deduction of up to Rs. One lakh to an individual or a Hindu undivided family (HUF) for:-
(i) making investments in certain savings instruments; or (ii) incurring expenditure on tuition fee and repayment of housing loan.
With a view to encourage small savings, the Government has taken a policy decision to include the investments made in the following two deposit instruments within the ambit of Section 80C:-
(i) Five Year Post Office Time Deposit Account; and (ii) Senior Citizens Savings Scheme.
Therefore, the investment by an individual or a Hindu undivided family (HUF) in these two instruments during the previous year 2007-08 (relevant to assessment year 2008-09), and subsequent years, shall be eligible for deduction under section 80C of the Income-tax Act, subject to the overall ceiling of Rs. One lakh in that section.
It is further clarified that investments made on or after 1.4.2007 (i.e. from the beginning of the financial year 2007-08) shall be eligible for this deduction.
Drawing and Disbursing Officers (DDOs) may take such investments into consideration while determining the TDS liability of an employee for the previous year 2007-08 (relevant to assessment year 2008-09) and subsequent years.
Professionals, both salaried and self employed, as well as traders should be prepared to pay more tax. The Centre is considering amending the Constitution to raise the ceiling on professional tax from Rs 2,500 per annum at present to Rs 5,000.
The tax on professions, trades, callings and employments, is collected by state governments or local bodies. This right is granted to them by the Constitution. State governments collect about Rs 3,000 crore through this tax.
The Centre is considering an amendment to Article 276 of the Constitution to raise the limit following a long-standing demand by the state governments, an official said. Though, some states have demanded raising the ceiling to Rs 10,000 per annum, the Centre is in favour of just doubling it. A final decision will be taken shortly, the official said.
Taxpayers are eligible to claim a deduction under income-tax against payment of this tax. With the income-tax collections growing by over 40%, state governments have been putting pressure on the Centre to enhance the limit. However, a hike in the ceiling may not have much of an impact on the Centre’s total income-tax collection.
Eight state governments including Karnataka, Maharashtra, West Bengal Andhra Pradesh, Tamil Nadu and Gujarat collect the tax on their own, while in several others do so through panchayats and local bodies.
The central government had amended the Constitution in 1998 to revise the limit to Rs 2500 per annum. However, many states have demanded a further revision following changes in the economic situation and rise in income levels in past nine years.
States are under pressure to meet increased expenditure on account of infrastructure, education and healthcare. A hike in the limit is expected to not just shore up revenues of state governments, but help them meet their financial requirements
Close on the heels of the Morgan Stanley decision of the Supreme Court, the Delhi Income Tax Appellate (Tribunal) has rendered two landmark rulings in the case of Rolls Royce and Galileo International Inc, dealing with constitution of permanent establishment (PE) and income attribution principles.
Attribution of profits has been a vexed question in international law, and in terms of complexity, the question of determination of PE may be considered as its second cousin. Simply stated, income of a non-resident foreign company is taxed if it has a PE in India.
Having established that the foreign company has a PE, the important determination to be made is what portion of the income should be attributed to such PE. The definition of what constitutes PE is a subject matter of interpretation under each treaty. In the absence of a treaty, the Revenue resorts to ‘business connection’ rule for bringing the non-resident’s income to tax in India.
Recently, the Apex Court attempted to clarify the law on attribution principles in the Morgan Stanley case. The industry, particularly IT and ITE’s, breathed a sigh of relief as the Court ruled that no attribution of profits was required where the Indian arm of a foreign company was compensated at arm’s length i.e. after due consideration of the functions performed and the risks borne in India. The two recent tribunal decisions, though rendered solely on facts, have again brought the issue to forefront in so far as determination of PE and attribution is concerned.
Rolls Royce (RR) case RR, manufacturers of aircraft engines, operates a liaison office in India. The Liaison Office did not comply with return filing requirement since its operations were non-income generating or, at best, the activities were classified as ‘preparatory and auxiliary’ for India-UK treaty purposes, which are specific exclusions from constitution of PE. However, Revenue took the view that the Liaison Office constituted a ‘dependant agent’ PE of the UK entity.
On the basis of a survey undertaken by the Revenue in the premises of the liaison office, the Revenue was able to vindicate its stand that Rolls Royce constituted a PE in India. As a fact finding authority, the Tribunal recorded a finding based on documents unearthed in the course of the survey
The Tribunal ruled that though contracts were signed outside India, the negotiations took place in India and hence, marketing profits arose from Indian operations residing within RR’s liaison office. Applying the principle of apportionment laid down by the Apex Court in the 1950’s in the Ahmedbhai’s case, the Tribunal directed the Revenue to charge to tax 35 per cent of profit.
While reduction of attribution from 75 to 35 per cent is welcome, it is viewed arbitrarily high and appears no less perplexing. Tax experts have questioned the justification for 35 per cent attribution without regard to arm’s length principle and use of scientific transfer pricing methodology.
Galileo Case Galileo International Inc is in the business of maintaining and operating the system for providing electronic global distribution services to airlines and tour operators by connecting travel agents with the assistance of Computerised Reservation System (CRS). Galileo appointed an independent Indian agent as ‘Distributor’ to market and distribute CRS services to travel agents in India.
The distributor, in turn, enters into Subscriber Agreements with travelling agencies with access codes, equipment, communications link and support services. The travel agent has an option to access Galileo’s CRS or may chose to access other CRS.
Galileo is remunerated outside India by the airlines and does not receive any remuneration from travel agents. Galileo pays fees for acting as a distributor and providing communication services. The distributor in turn charges fees from the travelling agents.
The Revenue held that income arose to Galileo as a result of hardware and systems installed in India. Further, profit on each segment booked through computers installed (in India) constitute a PE and that the distributor was an agent under India-US treaty.
In summary, the Tribunal held that a computer hardware with its operating systems constituted a PE, particularly since the distributor was an agent acting on behalf of Galileo.
It is for the Tribunal to find facts and for the high courts and the Supreme Court to lay down the law applicable to such facts.
In RR’s case, the Revenue department relied on survey findings for latter years to arrive at conclusion for earlier years. This is clearly a subject matter of debate. In the well reasoned Galileo order, whether a computer can constitute a PE or not is clearly debatable.
Well, if the European tax courts have adjudicated on whether a pipeline or vending machine is a PE, Indian courts will now adjudicate on computer constituting a PE. I have no doubt that substantial question of law arises in both cases, besides complex e-commerce cross border tax issue in Galileo’s case.
Income from international cross-border trade and investment may be taxed either in the source country or the country of residence. Residence taxation is based on the principle that tax payers should contribute towards the public services provided by the country where they are residents. Source taxation is justified by the view that the country which provides an opportunity to generate income should have the right to tax.
The degree of source versus residence tax depends on each treaty; capital-exporting richer countries prefer the OECD model treaty; which is favourable to residence, while capital-importing developing countries tend to favour the UN model treaty, which is more favourable to source.
With India no longer a predominant capital importer, but rather, a significant capital exporter, it is time that India reviewed its model treaty. It appears that we shall shift more towards a residence model. If we don’t, we shall run the risk of being meted stricter source-based interpretation in countries that follow source rules. It will be interesting to see how our treaty model goes through a change as we embark on path to become a OECD member.
Tax rate on sale of securities by NRIs remains unresolved
Thursday, December 20, 2007
The stock market today is open for both residents and non-residents. While the long-term gain from the transfer of unlisted securities is taxable at 20%, gains in the case of listed securities are taxable only at 10% (without indexation) under the proviso to Section 112 of the Indian Income Tax Act. The question that arises in such cases is whether the benefit of reduced rate of 10% is applicable only to resident taxpayers or to non-resident taxpayers also.
Long-term gains arising on transfer of listed shares if entered into on a recognised stock exchange and subjected to securities transaction tax (STT) have already been exempted from income tax by the Finance Act 2004. The only dispute, therefore, remains in the case of listed securities traded otherwise than through recognised stock exchange.
The proviso to Section 112, which provides for the reduced rate of 10% in case of listed securities, deploys the expression “before giving effect to the second proviso to Section 48”. Second proviso to Section 48 provides for indexation benefits and is not applicable to sale of shares by non-residents to whom the first proviso to Section 48 (providing protection from foreign exchange fluctuations) applies.
Therefore, a controversy arises whether the words “before giving effect to the second proviso to Section 48” used in the proviso to Section 112 has the effect of excluding those who cannot avail of the indexation benefit under the second proviso to Section 48, that is to say, non-residents.
The authority till now available in this respect was a decision of the Mumbai Tribunal in 2005 (ITA No 2552) wherein the Tribunal had held that as no effect had to be given for indexation in case of non-residents, the benefit under this section would also not be available to them and hence such long-term gains are taxable at 20%.
However, the Authority for Advance Rulings (AAR) has recently given a new turn to the controversy in the case of Timken France vs. DIT (294 ITR 513) by taking a view that the benefit of the proviso to Section 112 cannot be denied to the non-residents/foreign Companies that are entitled to a different relief in terms of first proviso to Section 48.
The AAR has, in giving the said ruling, expressly differed from the interpretation adopted by the Tribunal and held that the benefit of concessional rate of 10% is available to all categories of taxpayers discussed in Section 112 (including non-residents) and clear words would have been deployed in the proviso if one particular category - for example, non-residents, were to be excluded. The AAR further noted that the words “before giving effect to the second proviso to Section 48” do not by necessary implication exclude those ineligible for it and the eligibility to avail the benefit of indexation was not a sine qua non for applying the reduced rate of 10% prescribed by the proviso to Section 112.
The AAR also opined that the same interpretation would hold good for bonus shares also as the legislature did not intend to differentiate between the original and bonus shares in the matter of application of rate of tax.
The ruling by the AAR has come as a welcome relief to non-resident investors. However, as the ruling given by the AAR is binding only on the applicant who has sought the ruling and only has a persuasive/ argumentative value in other cases, the issue could lead to further litigation that can only be settled by the higher courts.
Till such resolution comes about, non-residents taxpayers may take an advance ruling in respect of such transactions to mitigate the associated risks.
The Madras High Court has declined to interfere with an Income Tax Department notice to the AVM Studio, directing it to pay service tax arrears of over Rs. 44 lakh.
Dismissing the writ petitions filed by the studio, which denied that it was a video production agency in terms of the provisions of the Finance Act, 1994, Justice K. Chandru said: “The court cannot convert itself into a fact-finding authority and take upon the task [of] analysing and sifting the evidence placed by the petitioner in the form of affidavit and supporting documents… Such an exercise is impermissible in a jurisdiction under Article 226 of the Constitution.”
In July 2007, the SIV Cell of the Commissionerate of Income Tax issued a letter directing the studio to furnish details of charges it had collected from clients and the service tax they paid.
When the studio denied that it was a video production agency, the department issued the show-cause notice, asking why it should not be charged Rs. 44,26,741 towards service tax. It was asked to reply within 30 days.
The judge said it was always open to the petitioner to challenge any adverse order against it, and the challenge at the stage of show-cause notice was misconceived.
Securities Transaction Tax (STT) is all set to become an effective tool for generating intelligence about income made from market operations. The Central Board of Direct Tax is examining ways of using the STT data on the lines of annual information return (AIR) to nab tax evaders.
The board had, earlier this year, set up an internal committee to examine how STT data could be used to generate intelligence on tax evaders. The committee has submitted its recommendations which are being examined now, sources told ET.
The income tax department already gets information on seven financial transactions under the AIR system. The transactions covered include purchase or sale of property over Rs 30 lakh, credit card spend of over Rs 2 lakh in a year, investments of over Rs 2 lakh in mutual funds, Rs 5 lakh in debenture/bonds, RBI bonds or bonds by company, Rs 1 lakh in shares, cash deposit of Rs 10 lakh in savings account.
The data will be very effective since it carries details of permanent account number, sources said. Market regulator Sebi has made it mandatory for all demat account holders to have a PAN. In fact, the government made PAN mandatory for all security market transactions in the last budget.
The data contained in STT returns is quite useful for verification of the genuineness of the transactions carried by investor or trader with PAN serving as a link. With the boom in stock market attracting many more, the income tax department feels that STT data could turn out to be an effective intelligence tool to track tax evaders.
Finance minister P Chidambaram had introduced STT in the Union Budget 2004. All investors in the stock market pay a fixed securities transaction tax of 0.125% for every transaction in cash for delivery of shares. However, transactions in derivatives trading attract lesser STT of around 0.017%. STT collections registered a growth of 57.61 % to Rs 3,783 crore in April-October 2007.
Number of high-value transactions that should be reported may increase
In a pointer to possible direct tax reforms in Budget 2008-09, advisor to the finance minister, Parthasarathi Shome, said the government might increase the number of high-value transactions that should be mandatorily reported and realign the income-tax structure.
Though Shome did not give details, he said the government was likely to increase the number of transactions that require reporting from seven (see box) to tighten scrutiny and check evasion.
He pointed out that Brazil covered 40 items under its annual information report (AIR) system and so it was possible for India to do more as well.
With the current reporting system capturing saving-and investment-related transactions, government sources say consumption expenses like on branded jewellery, high-end home gadgets, cars and foreign travel may be added to the list.
“With proper billing of high-value consumption items, it is possible to capture such data,” the source said.
Shome added the direct tax structure was also expected to come under scrutiny now that India’s voluntary compliance levels matched global standards.
The direct tax collections have been growing at over 40 per cent for the last two years while the number of assesses filing returns increased from 23.42 million in 2003-04 to 27.54 million in 2006-07.
The total number of assesses increased from 30.17 million to 31.92 million during the period.
“We can’t have a marginal rate of income-tax which is too high. The new income-tax code, which is likely to be floated shortly for consultation and discussion, will simplify income-tax laws and the overall structure,” Shome said.
Income slabs and tax rates may also be realigned as Finance Minister P Chidambaram has already said that if compliance improves, he may take a re-look at the whole tax structure. It is not known if such a move will be part of the coming Budget or the new income-tax code.
HOUSE owners may be in for a bonanza this Budget. The government may increase the tax exemption ceiling on rental income from existing 30% to 50%. The National Housing and Habitat Policy which has recommended increase the tax exemption limit after, after having been cleared by the Cabinet is likely to be tabled in the Parliament soon. As the proposal deals with taxation policy of the government, it is likely to be taken up in the Budget.
According to government estimates, around 16 million houses in the country which are remaining unoccupied would come into circulation. “Last year, the government announced levy of service tax on commercial properties. If the proposal to increase the floor for tax concession on rental income goes through it can become a revenue neutral exercise for the Centre,” a government official said. The official also said the move could encourage house owners to let out their properties which they lay vacant otherwise. It is estimated that crores will migrate to urban areas in the next decade as employment opportunities in the agriculture sector is decreasing by the day and rental housing is an appropriate way to accommodate a majority of the migrant population.
According to experts, the move would see a substantial increase in end-user consumption of available properties. Shortage of houses in the urban areas is a major cause for concern. The Eleventh Five Year Plan takes off with an estimated urban housing shortage of over 2 crore houses.
“The concept of developmental of rental housing bank by the corporate sector can become a reality only if the fiscal concessions are granted to them. Rental housing happens to be a big business activity in USA. Many corporations there own over hundreds of apartments for rental housing,” an official said.
“The move would certainly facilitate increased supply houses in urban areas. There is no other way to check prices and speculative practices than making actual physical supply available. Apart from facilitating construction of new houses, the government should also bring locked-up houses to circulation. As an incentivise the move would encourage more and more people to let out their properties. Additional supply will also help bring down the rentals also,” CB Richard Ellis MD Anshuman Magazine said
You read a newspaper and come across an announcement of bonus shares, or you realise that a company in which you are a shareholder has decided to demerge. what would be its tax implications? Read further.
Dividend: Any dividend, interim or final, that you receive from an Indian company is not taxable in your hands. However, the Indian company paying such dividends has to cough up dividend distribution tax.
The same is not true when it comes to dividends from shares in foreign companies — these will be taxable in your hands based on the slab of income in which you fall. As is widely known, individuals can invest up to $200,000 per year whether for acquiring immovable property overseas or foreign shares/securities or units of overseas mutual funds.
Thus, if you have received dividends from a foreign company, you will get taxed in India. If tax has been withheld in the foreign country, you could claim a credit for the same in your tax return.
Bonus, rights issue, buyback and stock split: In a bonus issue, you are awarded additional shares, in the ratio determined by the company. For instance, in a 1:1 ratio, you get a bonus share for every share held by you. While your shareholding will increase with the issue of bonus shares, it is important to not make the mistake of spreading out cost of your original shares, as whenever the bonus shares are sold, the cost of such shares will be considered to be nil.
For example, Ryan holds 100 shares of company A which were purchased (cost of acquisition) for Rs 2 lakh. Post declaration of bonus, Ryan was allotted 100 additional shares by the company.
The cost of the bonus shares will be considered to be nil and not Rs 1 lakh when determining the capital gains on sale of these bonus shares. Capital gains is the difference between the sale consideration and the cost of acquisition.
In a rights issue, the company entitles its shareholders to subscribe for additional shares. Where the shareholder renounces the right to subscribe to the right shares to a third party, the entire amount received for the renouncement will be taxable as capital gains. Where the rights shares are subscribed to and are subsequently sold, the amount actually paid for acquiring such shares will be considered as cost for determining the capital gains.
For determining whether the capital gains in case of bonus or right shares is short-term/long-term in nature, the date that one should consider is the date of actual receipt of such shares and not the date when the original shares were acquired.
If shares are held for more than 12 months, then the capital gains arising on sale are long-term capital gains. Long-term capital gains (LTCGs) are tax exempt if the transaction is done on a recognised stock exchange and Securities Transaction Tax (STT) has been paid upon the sale. Thus, it is essential to ascertain the correct period of holding.
A company may offer to buy back the shares held by shareholders. In such cases of buyback, the capital gains is the excess of buyback price over the original cost of shares. Stock split has no tax implications. Here, the face value of the share is split — the end result is that you end up holding a larger number of shares. You only need to apportion the original cost over the number of shares post the stock split.
Amalgamation and Demerger: While both are important events for the company, for the shareholders it means receiving shares of a new company in lieu of shares originally held (in case of amalgamation) and receiving shares of one or more companies as a result of shares originally held (in case of demerger).
In the case of amalgamation, the receipt of new shares in lieu of old shares is not treated as transfer of shares and hence not liable for capital gains. When the new shares received are sold, cost of the original shares will be considered for determining the capital gains.
In a demerger, due to the hive-off of one or more businesses of the company into a separate company, shares are issued by the new company to the shareholders. As a business is carved out from the original company, the cost of original shares is bifurcated in a ratio which is provided to the shareholders on issue of new shares.
The shareholders need to apply the ratio to determine the cost of new shares issued as a result of demerger and to reduce the cost of shares originally held. For example, Beena acquired 100 shares in company X on August 1, 2000 for Rs 12,000. Pursuant to demerger of the company, Beena received further 20 shares in company Y on January 1, 2007.
The ratio provided to the shareholders on demerger was 67:33. Accordingly, the cost of 100 shares in company X will be Rs 8,000 and of 20 shares in company Y will be Rs 4,000.
In both the cases, when the new shares received are sold, the period of holding of both the original shares and the new shares is to be considered to ascertain whether the capital gains is short-term/long-term in nature. For example, Beena sold the shares of company Y on April 1, 2007. Capital gains thereon will be long-term in spite of Beena holding shares for less than one year.
E-payment may become mandatory for corporate taxpayers from next year. With the success of e-filing, the government now wants corporates assessees to pay income tax through e-mode.
“A proposal in this regard is under active consideration of the Central Board of Direct Taxes,” an official said. E-payment could become mandatory from January 1, 2008. After a final decision on the date, a notification in this respect may be issued by the board.
Although the option of paying income tax through e-mode exists, it has not been made mandatory for any assessee category.
“Most corporates are already on e-payment, it’s banks that have to gear up to provide the infrastructure. In remote areas, however, the government should make it optional or take the step in a phased manner,” says Ernst & Young partner Amitabh Singh.
However, total collection through e-payment continues to remain low. In 2006-07, tax collection through e-payment was less than 1% of the tax collection of Rs 1,300 crore.
Although initially the proposal is to make e-payment mandatory for corporate assessees only, the government may look at doing the same for some other categories as well, the official said.
The government has made electronic payment of service tax mandatory for assessees who paid service tax of Rs 50 lakh or above last year. Similarly, excise assessees making payment in excess of Rs 50 lakh also have to pay by e-mode from April 1 this fiscal.
The e-filing of tax returns was mandatory last year, which, after initial hiccups, has stabilised.
At present, eight of the 32 agency banks, nominated to collect taxes — State Bank of India, Axis Bank, Punjab National Bank, Indian Overseas Bank, Canara Bank, HDFC Bank, IDBI Bank and Union Bank of India — already offer the facility. Fifteen other banks are likely to introduce the facility while two have expressed inability to do so.
