Additional Tax on buy back
of shares by unlisted companies: |
Sec.
|
Existing Law
|
Proposed Changes (w.e.f. 01-06-2013)
|
|
115-O
|
·
Any amount declared, distributed or paid by domestic company
·
out of current profits or accumulated profits
·
to its shareholders
·
shall be charged to additional tax (Dividend distribution tax) @
15%.
|
New
Section 115QA
ü Notwithstanding
anything contained in any other provision of this Act,
ü in addition
to the existing tax liability of a domestic Unlisted company,
ü any amount of
distributed income by the company in
excess of sum received by the company at the time of issue of
shares
ü on buy-back
of shares
ü from a
shareholder shall be
ü Charged to
additional tax @20% on the said distributed income.
** The additional tax will be similar in
the lines of DDT.
**Gain on sell of shares will be exempt
u/s 10(34A) in the hands of shareholders and will out of the purview of
section 46A.
|
|
10 (34)
|
·
Any income by way of
·
Dividend as per section 115-O
·
is exempt in hands of shareholders
|
|
|
46A
|
·
The consideration received by a shareholder
·
in excess of cost
·
on buy-back of shares by company is
·
is taxable as Capital Gains.
|
Comment:
1.
Buy-back of shares by the
domestic unlisted company will be subject to ‘Dividend Distribution Tax’ in the
excess of initial purchase price. Buy-back means purchase by a company of its
own shares in accordance with the provisions of Sec. 77A of the Companies Act. Distributed
income means the consideration paid by the company on buyback of shares as
reduced by the amount received by the company for issue of shares.
2.
Tax havens like Mauritius,
Cyprus, Switzerland etc. allow easy parking of money either through investments
or deposits. They may offer a range of incentives including a nominal capital
gains tax for companies to complete financial secrecy of accounts held by
individuals and corporate. Due to this practise ‘Organisation for Economic
Co-operation and Development (OECD) had blacklisted 25 nations for tax
relaxations they offer for parking funds
India is having DTAA with 84 countries and out of which DTAA
with few countries like Mauritius, Cyprus etc having a clause that capital
gains on transfer of shares will be taxed only in the place of residence. i.e.
in Mauritius or Cyprus etc. Further there is no capital gain tax in those countries.
Accordingly Indian Companies are distributing the accumulated profit to its
shareholders by opting Buy back route and that too without paying single rupees
as taxes.
3.
A recent Advance Ruling in
case of Armstrong World Industries
Mauritius Multi-consult Limited 252 CTR 260 (Now overruled) will
explain how this section is going to curb the tax avoidance scheme (when the
beneficiary is a non resident):
In this case the applicant, a tax
resident of Mauritius, is a wholly‐owned subsidiary of a UK Company. Indian
Company’s 99.97% share is held by the applicant and .03% shares held by UK Co.
Ind. Co proposes to buyback a part of its shares from the applicant under
Section 77A of the Companies Act,
1956. The applicant filed an application before AAR for seeking
taxability of capital gains arises in their hands by considering the provisions
of Income Tax Act as well as DTAA. Revenue contended that the applicant is a
shell company with no business purpose and that the transactions were
undertaken with the motive of tax avoidance. AAR held that capital gains in the
hands of Applicant Company are exempt by virtue of article 13 of DTAA between
India and Mauritius.
4.
The proposed amendment is
supposed to affirmed the Advance Ruling in XYZ
India, In re (343 ITR 455) AAR.
In this case the applicant, an Indian
company, 48.87 %, of whose shares were held by a group holding company in the
U.S.A, 25.06 % by a group holding in Mauritius, 27.37% by a group holding company
in Singapore and 1.76 % by the general public. The board of directors of the
applicant passed a resolution proposing a scheme of buy back of its shares from
its existing share holders in accordance with section 77A of the Companies Act
1956. Mauritius Company which acquired the shares sought advance ruling on
whether the capital gains that may arise were chargeable to tax in India in
terms of DTAA.
AAR held that, the proposal of buy-back in
the instant case is a scheme devised for avoidance of tax. Capital gains
exemption under India-Mauritius DTAA is not available. Remittance being in the
nature of dividend payment, withholding of tax at source u/s 195 is required.
5. The companies, opting for buy back
route, is required to pay additional tax @ 20% (plus surcharge 10% &
education cess @3%) even if there is no liability to pay tax. The Tax is
required to be paid to the government within 14 days from the date of payment
of any consideration to the shareholders.
6.
There will be no tax credit in
any manner either to the company or any other person and the taxes paid on this
account shall be treated as final tax payment in respect of said income. In
case of failure to deposit the taxes in time, the principal officer or the
company shall be deemed to be assessee in default and the company will be
liable to paid interest @1% for every month or part of the month for the period
starting after the expiry of 14th Day from the payment to
shareholder.
7.
To remove the cascading effect
it has been proposed that income arising in the hands of shareholder will be
exempt by virtue of newly induced section 10(34A).
8.
In case of resident shareholders proposed
amendment will make an adverse impact in certain cases. In case of buy back for
a price less than the cost price, the shareholder will not get the benefit of
resultant loss. In case of long term capital gains, benefit of indexation will
be lost to them.
9.
The provision will enable the
taxing authorities to collect the taxes on single point and also at the
earliest point of time. The proposed new section will override the entire
Income Tax Act and when become law, will curb the tax avoidance scheme,
particularly planned through the “Mauritius Route“ as explained above.
Extract
of Memorandum:
“ A company, having
distributable reserves, has two options to distribute the same to its
shareholders either by declaration and payment of dividends to the
shareholders, or by way of purchase of its own shares (i.e. buy back of shares)
at a consideration fixed by it. In the first case, the payment by company is
subject to DDT and income in the hands of shareholders is exempt. In the second
case the income is taxed in the hands of shareholder as capital gains.
Unlisted Companies, as part of tax avoidance scheme, are
resorting to buy back of shares instead of payment of dividends in order to
avoid payment of tax by way of DDT particularly where the capital gains arising
to the shareholders are either not chargeable to tax or are taxable at a lower
rate.”
Transfer of immovable
properties held as Stock in Trade : |
Existing Law
|
New section 43CA
|
|
Section 50C:
·
When a Capital asset,
·
being immovable
property (except stock in trade),
·
is transferred
for a consideration
·
which is less than
·
the value for
the purpose of payment of stamp duty in respect of such transfer,
·
then such value
(stamp duty value) will be taken as
full value of consideration.
|
New Section 43CA:
·
Where the
consideration for the transfer of
·
an asset (Other than capital asset),
·
being land or
building or both,
·
is less than
the stamp duty value, then
·
the value for
stamp duty calculation
·
shall be deemed
to be the full value of the consideration
·
for calculating
Business Income.
ü Where the
date of sale agreement (for fixing final consideration) and the date of
registration of such transfer of asset are not the same,
ü
then the value may be taken as value for payment of stamp duty in respect of such
transfer
ü
on the date of the agreement.
ü
provided the seller has received on or
before the agreement date full or partial consideration from the buyer (other
than cash).
** Stock in Trade will now be taxed as
per stamp duty valuations.
** Provisions of section 50C (2) & 50C
(3) will apply for determination of stamp duty value.
|
Comment:
1.
Presently when a capital assets
(other than stock in trade) is sold for a consideration, which is lower than
the stamp duty value, then the stamp duty value is considered as deemed sale
consideration for the purpose of computing capital gains. From the definition of
capital assets as given in section 2(14) ‘Stock in Trade’ is specifically
excluded. After introduction of this section, concept of deemed sales
consideration being stamp duty value will be applied on ‘stock in trade’
transferred by builders / real estate developers.
2.
Proposed amendment will lead to
double taxation in certain cases. For e.g. If a property sold by real estate
developer (say for INR 40 lakh) is less than the stamp duty value (say INR 50
lakh), then INR 10 lakh will be taxed as business income in the hands of
developers.
Consequently, buyer is getting property for INR 40
lakh, which is less than by INR 10 lakh from stamp duty value and accordingly
INR 10 lakh will be taxed in the hands of buyer u/s 56(2)(vii) as income from
other sources.
3.
The word “other than Cash” may
be interpreted in a different manner. Any payment by way of book entry can be
considered as valid payment under this section. Further payment through bearer
cheque can be a sufficient compliance.
4.
No Corresponding amendment has
been proposed in section 50C where there is a time gap between the agreement
date and the registration date.
5.
In principle following case
decision are seems to be overruled by proposed amendment:
a) Indralok Hotels (p) Ltd. (122 TTJ 145) Mumbai,
wherein it has been held by ITAT that stamp duty valuation as prescribed in
section 50C will applied in case of sale consideration for computing capital
gains only. Further ITAT held that Section 50C will not be applicable on Stock
in Trade.
b) Excellent Land Developers (p) Ltd. (1 ITR 563)
Delhi: wherein ITAT held that section 50C cannot be applied for calculating
business profit. ITAT further held that section 50C does not apply to stock in
trade.
c) Kan Construction & colonizers (p) Ltd. (70
DTR 169) Allahabad HC: High court in this case held that provision of
section 50C will not apply to land and building held as stock in Trade.
Extract of Memorandum:
“ Currently, when a
capital asset, being immovable property, is transferred for a consideration
which is less than the value adopted, assessed or assessable by any authority
of a State Government for the purpose of payment of stamp duty in respect of
such transfer, then such value (stamp duty value) is taken as full value of consideration
under section 50C of the Income-tax Act. These provisions do not apply to
transfer of immovable property, held by the transferor as stock-in-trade.
It is proposed
to provide by inserting a new section 43CA that where the consideration for the
transfer of an asset (other than capital asset), being land or building or
both, is less than the stamp duty value, the value so adopted or assessed or
assessable shall be deemed to be the full value of the consideration for the
purposes of computing income under the head “Profits and gains of business of
profession”.”
TDS on transfer of Immovable
properties: |
New Section 194-IA
(w.e.f. 01-06-2013)
|
|
ü Any
person, being a buyer,
ü responsible
for paying (other than the person referred to in section 194LA **)
ü to
a resident seller / transferor
ü any
sum by way of consideration (INR 50
lakh or more) for transfer of any immovable property (other than
agricultural land),
ü shall,
ü at
the time of credit of such sum to the account of the transferor or at the time
of payment of such sum in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier,
ü Deduct
an amount equal to 1% of such sum as income-tax thereon.
**
Section 194LA covers the situation for payment of compensation of certain immovable
properties on account of compulsory acquisition under any law.
|
Comment:
1.
This section is similar to
section 194LAA proposed in Finance bill 2012, which was subsequently withdrawn
for the reasons best known to the finance ministry. It will be interesting to
see whether this time the said provision will become law or not? In comparison
to amendment proposed by Finance bill 2012, the impact of earlier proposal has
been diluted to a certain extent. The thrash hold exemption of INR 20 lakh for
property situated in other than urban areas has not been incorporated, rather
an exemption of INR 50 lakh for property situated in all areas, has been
proposed. Due to this proposal, properties located in areas other than urban
areas may be out of purview of this section. Further, Proof of deposit of TDS
which was mandatory for registration of property, as proposed in Finance bill 2012,
has been ignored in the Budget 2013.
2.
Proposed section will be
applicable for transfer of property (other land agricultural land), on or after
1st June 2013, having a value of INR 50 lakh or more. Tax will be
deducted on actual consideration and not on the deeming consideration as
prescribed by section 50C of the IT Act.
3.
The proposed amendment has an
adverse impact on assessee who is likely to reinvest the sale consideration in
the residential house for claiming exemption u/s 54, as the 1% of the
consideration gets blocked till the time assessee gets refund from Income Tax
department.
4.
In case the seller is not having
PAN then the buyer is required to deduct tax @20% as per section 206AA of the
Income Tax Act.
5.
A simplified guidelines, in the
lines of proposals in finance bill 2012, i.e. simple 1 pager challan, no
obligation to obtain TAN & no obligation to file TDS return etc, will make
life easier for taxpayers.
6.
The provision, when become law,
will keep a proper track on all high value property transactions of the
country.
Extract
of Memorandum:
“ On transfer of immovable property by a non-resident, tax is
required to be deducted at source by the transferee. However, there is no such
requirement on transfer of immovable property by a resident except in the case
of compulsory acquisition of certain immovable properties. In order to have a
reporting mechanism of transactions in the real estate sector and also to
collect tax at the earliest point of time, it is proposed to insert a new
section 194-IA to provide that every transferee, at the time of making payment
or crediting of any sum as consideration for transfer of immovable property
(other than agricultural land) to a resident transferor, shall deduct tax, at
the rate of 1% of such sum.”
In order to
reduce the compliance burden on the small taxpayers, it is further proposed
that no deduction of tax under this provision shall be made where the total
amount of consideration for the transfer of an immovable property is less than
fifty lakh rupees.”
Immovable properties
received for Inadequate consideration : |
Present Law Section 56(2)(vii)(b)
|
Proposed Changes
|
|
·
Where any immovable property is
·
received by an individual or HUF
·
without
consideration,
·
the stamp duty value of which exceeds INR
50,000
·
shall be charged to tax in the hands of the
individual or HUF as income from other sources.
|
New Sub clause (b)(ii)
inserted
Where
any immovable property received by an individual or HUF
·
for
a consideration
·
which is less than the stamp duty value of
the property
·
by an amount exceeding INR 50,000
·
the stamp duty value of such property as
exceeds such consideration.
·
shall be charged to tax in the hands of the
individual or HUF as income from other sources.
ü Where the date of sale agreement (for fixing final
consideration) and the date of registration of such transfer of asset are not
the same,
ü Then the value may be taken as the value for the purpose of
payment of stamp duty in respect of such transfer
ü On the date of the agreement.
ü Provided the seller has received on or before the agreement
date full or partial consideration from the buyer (other than cash).
|
Comment:
1.
In case any immovable property
received for a consideration, by an Individual or HUF, which is less than the
stamp duty value by INR 50,000; then the difference between the stamp
duty value and such consideration, be taxed as income from other sources in the
hands of recipient individual or HUF.
2.
The word “other than Cash” may
be interpreted in a different manner. Any payment by way of book entry can be
considered as valid payment under this section. Further payment through bearer
cheque can be a sufficient compliance.
3.
The said provision will lead to
double taxation. In case property sold by the seller (say for INR 40 lakh) is
less than the stamp duty value (say INR 50 lakh), then INR 10 lakh will be
taxed in the hands of seller by virtue of section 50C.
Consequently, buyer is getting property for INR 40
lakh, which is less than by INR 10 lakh from stamp duty value and accordingly
INR 10 lakh will be taxed in the hands of buyer u/s 56(2)(vii) as income from
other sources.
4.
Similar provision was first
introduced by Finance Act 2009 w.e.f 1st October 2009, which was
subsequently withdrawn by Finance Act 2010 with retrospective effect. The same
is once again proposed by Finance bill 2013. It will be interesting to see how
much time the proposed amendment will be
sustained?
Extract
of Memorandum:
“The existing provision does not cover a situation where the
immovable property has been received by an individual or HUF for inadequate
consideration. It is proposed to amend the provisions of clause (vii) of
sub-section (2) of section 56 so as to provide that where any immovable
property is received for a consideration which is less than the stamp duty
value of the property by an amount exceeding fifty thousand rupees, the stamp
duty value of such property as exceeds such consideration, shall be chargeable
to tax in the hands of the individual or HUF as income from other sources.
Considering
the fact that there may be a time gap between the date of agreement and the
date of registration, it is proposed to provide that where the date of the
agreement fixing the amount of consideration for the transfer of the immovable
property and the date of registration are not the same, the stamp duty value
may be taken as on the date of the agreement, instead of that on the date of
registration. This exception shall, however, apply only in a case where the
amount of consideration, or a part thereof, has been paid by any mode other
than cash on or before the date of the agreement fixing the amount of
consideration for the transfer of such immovable property.”
Keyman Insurance
Policy: |
Present Law
|
Proposed Changes
|
|
Section 10(10D)
·
Any sum received under
·
a life insurance policy
·
other than a “Keyman
insurance policy”
·
is exempt in the
hands of recipient.
Explanation 1 to Section 10(10D)
·
“Keyman insurance policy means
·
life insurance policy taken by
a person on the life of another person
·
who is or was the employee of the first-mentioned person or
·
is or was connected in any manner whatsoever
·
with the business of the first-mentioned person.
Section 28:
·
Any sum received under a Keyman Insurance Policy including any bonus
thereof
·
is taxable as Business income.
|
Revised Explanation 1 to Section 10(10D)
·
“Keyman insurance policy means
·
life insurance policy taken by a person on the life of another person
·
who is or was the employee of the first-mentioned person
·
or is or was connected in any manner whatsoever
·
with the business of the first-mentioned person.
AND INCLUDES
·
such policy
·
which has been assigned to
a person,
·
at any time during the term of the policy,
·
with or without any
consideration.
|
Comment:
1.
Any Keyman Insurance policy
assigned to Keyman will not change its character i.e. will continue to be
Keyman insurance policy and amount received on maturity will now be taxable as
business income in the hands of Keyman. This is a very good amendment to plug
the loophole in tax law.
2.
Following case decisions are
seems to be overruled:
a) Rajan Nanda (249 CTR 141) Delhi, wherein HC
had held that Amount received by employee director on maturity of insurance
policy, which was taken earlier by company and which was assigned to him by the
company is not taxable in the hands of director.
b) Naresh Kumar Treben (249 CTR 141) Delhi, wherein
HC held that once there is an assignment of Keyman insurance policy by employer
company to employee, insurance policy gets converted into an ordinary policy
and hence, in that case, maturity value received by employee would not be subjected
to tax in view of section 10(10D).
Extract
of Memorandum:
“ It has been noticed that the policies taken as keyman
insurance policy are being assigned to the keyman before its maturity. The
keyman pays the remaining premium on the policy and claims the sum received
under the policy as exempt on the ground that the policy is no longer a keyman
insurance policy. Thus, the exemption under section 10(10D) is being claimed
for policies which were originally keyman insurance policies but during the term
these were assigned to some other person. The Courts have also noticed this
loophole in law.
With a view to plug
the loophole and check such practices to avoid payment of taxes, it is proposed
to amend the provisions of clause (10D) of section 10 to provide that a keyman
insurance policy which has been assigned to any person during its term, with or
without consideration, shall continue to be treated as a Keyman insurance
policy..”
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