Compliance Cost

Host of tax and regulatory laws are applicable for carrying on a business in India. Everyone makes a level best efforts to comply these laws. However everyone would have bitter experience with law implementing agencies for one or other reasons. 

List of tax & regulatory laws are very large. For simplicity we can categorise these laws in 3 classes:

1. Laws applicable to the form of organisation and nature of business e.g. Companies Act, LLP Act, Partnership Act, IRDA, SEBI, RBI, BRA etc.
2. Laws related to employees, environment in which organisation exists e.g. Employers Liability Act, Payment of bonus Act, Payment of Gratuity Act, Payment of Wages Act, Maharashtra Labour Welfare Act, The Bombay Shop & Establishment Act, Industrial Employment Act, PF Act, ESIC Act, Maternity Benefit Act Child Labour Act, Bonded labour Act, Equal Remuneration Act, Pollution laws, MSME Act etc. 
3. Tax laws: (i) Direct tax which includes Income-tax, Wealth-tax, Income-tax also has various sub-sets like TDS, TCS, International tax. (ii) Indirect Tax includes CST, MVAT, Excise, Customs, Service-tax, LBT, Octroi etc.

Complying with various tax and regulatory laws requires understanding of the provisions of each Acts, their implication on business and maintenance of certain records, registers, filing of regular returns etc. Business need incurred cost performing various tasks associated with complying government regulation cost may involve in-house or through employing professional or both. In-house compliance teams have limitation due to unavailability of the trained manpower and emergence of new compliance requirements. To illustrate on emergence of new compliance requirement, post filing TDS returns TDS certificates are required to be issued to the parties. Generation of TDS with respect to Salaries has two stages. Stage one generate certificate using the tax department’s portal for some aspect and for certain other aspects details to be generated using certain manual process. This certainly doubles the time and process. For the current financial year along with the filing of return online various reports are required to be filed online along with return of income.

However in order to gain comfort with respect to level of compliance of relevant laws, diligence exercise need be carried at regular interval.

Receipt of buy-back of shares

Current provision: 

Receipt on buyback of shares is subject to tax under the head Profits & Gains of Business or Profession or Capital Gains.

Propose Amendment: 

It is proposed to provide that any income arising to a shareholder, on account of buyback of shares of an unlisted company on which tax is paid under section 115QA, would be exempt.

Applicability: 

Amendment applies from 1-4-2014

Implication: 

As per new Chapter XII-DA – Special Provision Relating to Tax on Distributed Income of Domestic Company for Buy-back of Shares, income arising out of buyback of shares of unlisted company is subject to special rate of tax under section 115QA on similar lines as dividend distribution tax. In order to avoid double taxation, it is provided that no tax would be paid by recipient when such income is subject to distribution tax. However, proposed provisions try to nullify treaty benefits on account of capital gains. Authority of Advance Ruling in Armstrong World Industries Mauritius Multiconsult Ltd., In re[1], considering the provision of India-Mauritius DTAA, has held that capital gain from buy-back of shares is not taxable in India.

Authority of Advance Ruling in RST In re[2], held that if a shareholder receives any consideration from any company for purchase of its own shares, Section 46A, special provisions would be applicable and it would prevail over the general provision of section 45 of the Act. It also held that provisions of section 47 overrides section 45 and not 46A. however no consequential amendment has been proposed under section 46A.

Income on buy back would be exempt only if buy back is subject to compliance of Section 77A of the Companies Act, 1956. In case provision of Section 77A are not complied, distribution on buyback would not be subject to tax under section 115QA and consequently not exempt under new provisions. However in case a scenario issue may arise whether such proceed would be treated as dividend and provisions of Section 115-O triggered? If so, whether, company would be liable to pay DDT @ 16.995% instead of 22.6600% and income in the hands of shareholders would be exempt under section 10(34)?

New exemption would also create various other issues. Investors would not be allowed deduction of any expenditure incurred or cost of improvement with respect to shares. In case of loss is incurred by the investor, loss may not be allowed for set off or carry forward. Issue may also arise whether credit of the tax so paid would be allowed to the non-resident in his country as per the provisions of DTAA?  Further moot question may be raised whether such distribution of income can be subject to charge under Income-tax Act, 1961?

(Extracts from the article published in the Chambers Journal March 2013)

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[1] [2012] 24 taxmann.com 213 (AAR - New Delhi)

[2] [2012] 19 taxmann.com 215 (AAR – New Delhi)

Keyman Insurance policy - Taxability proposed changes

Current provision: 

Sub-clause (d) to clause (10D) of Section 10 provided that any sum received under keyman life insurance policy would not be entitled for the exemption under section 10(10D). There was anomaly whether receipt of life insurance policy would be exempt or chargeable to tax in case such keyman life insurance policy is assigned to the keyman. However Delhi High Court in case of Rajan Nanda[1] has held that once there is assignment of keyman life insurance policy by a company / employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy and such person in whose favour insurance policy is assigned at the time of maturity can claim exemption u/s 10(10D).

Proposed amendment: 

It is proposed to amend the Explanation providing that keyman insurance policy on assignment to keyman, with or without consideration, would continue to remain key insurance and accordingly, any receipt from it would not be exempt.

Applicability: 

Amendment applies from 1-4-2014

Implication:

Any receipt on keyman life insurance policy post its assignment (with or without consideration) to the employee / keyman would be now chargeable to tax. Further receipt would be taxable even if amount is received by the family members on the death of keyman.

Though this amendment is prospective, it may have retrospective effect in the sense that it applies to existing policies too. Amended provisions would apply in respect of any keyman insurance policy whether taken before or after 1/4/2013. It would even apply to those life insurance policies which has assigned before 1/4/2013 and whose maturity falls on or after 1/4/2013. 

Issue would arise as under which head sums would be taxable? Whether such maturity proceeds would be taxable as salaries or business income or capital gain or income from other sources? Whether whole maturity proceeds would be taxable or maturity proceeds less consideration on transfer, if any, would be taxable. Whether any benefit in respect of premium paid by assignor would be available or not? Can assignee claim indexation benefit on consideration paid by him or paid by the assignor? What would be the implications if assignee is not the employee? Specific provision to rest above issues needs to be introduced. Otherwise change in tax treatment would invite undrawn litigation.

(extracts from the article published in the Chamber's Journal March 2013)

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[1] CIT vs. Rajan Nanda [2012] 18 taxmann.com 98 (Delhi)