'Expect no restriction on CSR expenditure'

By Dr. Suresh Surana,

The Union budget 2020 which would be presented on 1 February 2020 in the backdrop of need to revive economic growth and employment amid mounting fiscal deficit. With the intention of boosting the economy, the government has already implemented a concessional tax regime option for corporates and for new manufacturing companies. The following are some of the expectations of the corporate sector from Budget 2020:

Overhaul of Dividend Distribution Tax (DDT) provisions

Presently, the dividend distribution tax is levied at 20.5553% on distribution of profits by domestic companies u/s 115O of Income-tax Act, 1961 (‘IT Act’). DDT rate could be reduced to 15% (inclusive of surcharge and education cess) and simultaneously, the grossing up concept for computing DDT u/s 115-O should be done away with.

Currently, dividend received set off which can be availed by an Indian company is restricted to one level. The issue of dual taxation of dividend paid in case of more than 2 tier structure still exists and it would be reasonable to expect that in case of multi-tier holding structure deduction should be permissible for dividends declared to the extent of dividend income.

The present system of DDT is not a withholding tax on dividends and as a result, non-residents are unable to claim credit for the same in their country of tax residence. The re-characterization of “Dividend Distribution Tax” as “Dividend Withholding Tax (DWT)” for Non-Residents will enable foreign Shareholders to claim credit for such withholding tax under the Tax Treaty in their country of tax residence.

Deduction in respect of employee costs – Section 80JJAA

With a view to give employment generation benefit to all sectors, section 80JJAA had been substituted with a new section vide Finance Act 2016, which gives deduction of 30% of additional employee cost for three assessment year to all assesses who are audited under section 44AB. The deduction is restricted to employees drawing salaries/wages up to Rs. 25,000 per month which has severely restricted the benefit as several employment intensive businesses have large section of workforce drawing remuneration exceeding the above threshold.
It is widely accepted that employment generation is key to economic growth and has multiplier effect of appx. 7 times. It is expected that the limit of emoluments be increased to Rs. 100,000 a month from Rs. 25,000 per month. It is also more appropriate to extend the benefit to the overall employee cost albeit at a reduced rate of 10% instead of 30% of the additional employee cost. This will ensure that not only the new job creation is critical but existing jobs get the same beneficial treatment and prevent abuse by shifting employees. Also, as the manufacturing sector employs maximum contract labour, the benefits under this section can be extended to contract labour as well. This would enable a larger section of the manufacturing and service sector to avail the benefit of deduction thereby generating employment and stimulating growth. Such loss from increased deduction shall be offset by additional economic activity resulting in additional GST and direct tax collection.

Section 132(9B) of the Income-tax Act to be rationalized and stock in trade to be excluded from Provisional attachment in search proceedings

One of the amendments made by the Finance Act 2017 in the Income-tax Act, 1961 was the introduction of subsection (9B) in Section 132 of the IT Act. As per the provisions of section 132(9B), during the course of a search or seizure or within a period of sixty days from the date on which the last of the authorizations for search was executed, the authorized officer on being satisfied that for protecting the interest of revenue it is necessary so to do, may attach provisionally any property belonging to the assessee with the prior approval of Principal Director General or Director General or Principal Director or Director.

The current provisions of the legislated Act provide for provisional seizure of any property, which therefore can be interpreted to include all assets including stock-in-trade. Further, as per the provisions of newly inserted section 132(9C), the provisional attachment can be for a period of 6 months.

The same could lead to disruption of business due to attachment of stock, especially for the gems and Jewellery sector and which in turn would have significant ramifications on the India’s exports and India’s evolving image as a manufacturing centre under the “Make-in-India” initiative.

It is expected that stock in trade be excluded from the current provisional attachment provisions or at least a proviso be inserted to provide that any bullion, jewellery or other valuable article or thing being stock in trade of the business found as a result of search shall not be seized but the authorised officer may make a note or inventory of such stock in trade of the business.

Benefit of section 115BBD be extended for taxation of foreign dividends received by Partnership Firms / LLPs / Resident Individuals Investing Outside India

Section 115BBD of the IT Act provides for concessional tax rate of 15% on foreign dividends (where equity share capital holding exceeds 26%) earned by Indian companies only. Under the Foreign exchange Outbound Investment regulations, LLPs, partnership firms & Resident Individuals are also eligible to make outbound investments and as such, similar concessional tax rate of 15% should also be made applicable to foreign dividends earned by partnership firms / LLP / Individuals from their foreign investments.

Allowability of CSR Expenditure

A number of companies are mandatorily required to expend certain amount towards Corporate Social Responsibility (CSR) activities under the provisions of the Companies Act 2013. The provisions of the Income Tax Act 1961 introduced under section 37(1) post the insertion of CSR provision, works in cross purposes with the company law regulations. In response to such CSR expenditure to be incurred by the Corporates, the Finance Budget of 2014, by way of introduction of Explanation 2A to Section 37(1) of the Act, clarified that any such expenditure would not be deemed to be incurred for the purpose of business and hence would not be liable to be deducted for the purpose of computation of tax liability. The corporate sector expects that there should be no such restriction on the allowability of such CSR expenditure as the same forms an integral part or necessity for the purpose of carrying out the business and are within the four corners of the regulatory requirements.

Increasing the variation limit of fair value (difference between consideration and stamp duty value) from 5% to 10% in section 50C, 43CA & 56(2)(x)

Certain provisions of the Income Tax Act, 1961 like Sections 50C, 43CA & 56(2)(x) provide for the tax to be levied in case of immovable property on the higher of the sale consideration or stamp duty value instead of simply levying the tax on the transaction value or sale consideration. However, with the intent to minimize the hardship of the taxpayer in case of genuine transactions, the Finance Act of 2018 restricted the applicability of such provision in cases where the stamp duty value exceeds the sale consideration by 5% or more. However, there has been a sluggish demand in the real estate sector as a result of which the property prices are moving downwards as against the stamp duty value, which has steadily increased. Thus, this may fail to serve the purpose of the 2018 amendment to exclude genuine taxpayers from this hardship. Thus, considering the practical reality scenario, the variation limit is expected to be increased from 5% to 10%, so that unwarranted litigation under section 50C, 43CA & 56(2)(x) be reduced.

Clarification to be brought in section 56(2)(x) to exclude rights issue, bonus issues from its purview

Section 56(2)(x) provides for taxation of any receipts received by an assessee without consideration or for inadequate consideration.

It is expected that clarification be brought in this section for excluding bonus shares or right shares received from the ambit of section 56(2)(x) of the IT Act. On plain reading of the section, there is ambiguity with respect to chargeability of receipt of bonus shares or right issue shares under the above section as these shares are received without or inadequate consideration as compared to the fair market value of these shares. Hence, clarification must be in the said section to exclude from chargeability of tax, receipt of bonus shares or right shares by the existing shareholders. Alternatively, as there is a lot of ambiguity on notional basis taxation of shares on issue, receipt and transfer under section 56(2)(viib), 56(2)(x) & 50CA respectively, it can be considered to exclude the notional taxation provisions to promote investments.

Extension of sunset clause benefit for Affordable Housing Projects – Section 80-IBA

The Finance Act, 2016 had introduced Section 80-IBA which provided deduction for profits generated from the business of developing and building affordable housing projects. one of the conditions attached to the deduction which is expected to be revised includes period of Project approval by competent authority to be extended further by 1 year from 31st day of March 2020 to 31st day of March 2021.
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Flexibility in regard to the acceptance of payment modes – Section 269SU

With the intention to promote the digital economy, the Finance Budget 2019 introduced Section 269SU which required every person with business turnover of more than Rs. 50 crores to provide all the following modes for the purpose of acceptance of payment:

Debit Card powered by RuPay;
Unified Payments Interface (UPI) (BHIM-UPI); and
Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code).

It is pertinent to note that the assessee has to mandatorily provide for all the modes and does not have an option to provide any one of them. Moreover, failure of the asssessee in installation & operationalization of such facilities by 31st January 2020 would attract penalty of Rs. 5,000/- per day of default. Considering that the same would prove to be an unnecessary hardship for the businesses, the assesses should be provided an option to provide to opt for any of the above prescribed modes.

Abolishment of MAT for SEZ units

MAT was introduced to bring into tax net "zero tax companies" which in spite of having earned substantial book profits and having paid substantial dividends, did not pay any tax due to various tax concessions and incentives provided under the income tax law. It may be noted that over the period of time, while the concessions and incentives have gradually reduced on one hand, the MAT rates have progressively increased from 7.5% in 2000 to 18.5%. Recently, vide the Taxation Amendment act 2019, the MAT rate was rationalized and reduced to 15% (plus applicable surcharge and cess).

Further, most of the export oriented manufacturing units are in SEZ, while the GST exemption is provided to SEZ units, MAT which was introduced subsequently for SEZ units at the rate of 18.5% (plus applicable surcharge and education cess) is against the policy commitment made earlier while attracting SEZ investments. Though MAT rate has been reduced to 15%, it does not justify the policy commitment on tax exemption to the SEZ unit owners, was rolled back by introducing MAT. It may be expected that MAT be abolished for SEZ units to further boost exports and facilitate job creation.

Aligning section 14A with section 115BBDA (which taxes dividend above Rs. 10 lacs)

Section 115BBDA of the Income-tax Act, 1961 taxes dividend exceeding Rs. 10 lakhs in the hands of partnership firms / LLP / Individuals / HUFs, etc. The same is taxable at the rate of 10% under the said section. Given that income earned therefrom is not exempt under the IT Act, a suitable clarification is expected under section 14A of the IT Act to exclude such investments.

(The writer is Founder of RSM India)