Evaded Tax on `Penny' Gains? Face the Music

Mumbai: Sachin Dave & Maulik Vyas





I-T to send notices to 1k individuals, also target promoters of such cos

[News Story published in Economic Times Mumbai Edition on 29 July 2016 on page 17 - In the Story Paras Savla was quoted]

The income-tax department is planning to send notices to about 1,000 individuals who may not have paid tax on money earned through trade in penny stocks, people aware of the matter said. Penny stocks are shares with value not exceeding a few rupees.

This follows an analysis done by the revenue department and the Central Board of Direct Taxes (CBDT) earlier this year of transactions in penny stocks on the country's bourses. The analysis was based on data obtained through the capital markets regulator, the Securities and Exchange Board of India (Sebi), and from some investigation agencies like the Investigation Directorate and Enforcement Directorate.

“While manipulation of penny stocks is an offence and Sebi may have penalised investors caught doing that, these investors may not have paid tax on such transactions,“ one of the persons cited earlier said. “Also, there were some investors who may not have come under the scrutiny at that time.“

The revenue department's notice to such individuals will give them time until September to declare undisclosed income under the income declaration scheme (IDS). Tax officials will go after those who do not fall in line, the person quoted earlier said, adding that the revenue department is also planning to send notices to promoters and senior executives of penny stock companies who may have benefited from such transactions.

“While Sebi had come down hard on some of the penny stock manipulations done by some investors, tax payers who have evaded income tax may be asked to declare their undisclosed income under the current IDS,“ said Paras Savla, Partner, KPB & Associates, a tax consultancy "Failure to declare money would lead to reopening of assessment after after September. On confirmation of addition, they may face concealment penalty at the rate of 200% on tax evaded.“

Industry trackers said the government is keen on making the IDS a success. Officials in the income tax department say the scheme as not had “much success“ as not many people are coming forward to declare their unaccounted income and wealth.

“This is a step by the govern ment in line with its aim of cracking down on the source of black money . The government has been urging people to come forward and declare undisclosed income wealth by paying a onetime tax at the rate of 45% and to put the matter to rest once and for all,“ said Sanjay Sanghvi, partner, Khaitan & Co, a law firm.

In March this year, the CBDT had issued a circular regarding manipulation in penny stocks.It had pointed out that some investors had artificially raised prices of some penny stocks in order to book profits or claim losses. The manipulation was done on some stocks traded on the Calcutta Stock Exchange.Officials said similar manipulations may have happened on other stock exchanges too.

Tax officials are also looking at business transactions of some small companies. There is a suspicion that some companies may have converted black money to white for investors for a small fee.

http://epaperbeta.timesofindia.com/Article.aspx?eid=31818&articlexml=Evaded-Tax-on-Penny-Gains-Face-the-Music-29072016017013

Shattering 10 frequently believed tax-filing myths

Shattering 10 frequently believed tax-filing myths

In the Story views of Paras Savla, Chartered Accountant has been quoted by the writer

In spite of paying taxes and making investments to save taxes, one can be denied the benefit if they aren’t reflected in income tax returns or returns filed remain invalid. 

Thousands of new taxpayers would be brought under the tax-filing ambit due to the rampant tracking initiatives of the Income Tax Department and there are hardly a few days left to file your tax returns within the deadline of July 31, 2017. But in the scramble to meet the deadline, don’t forget the essentials to file the tax returns for the assessment year 2016-17 (pertaining to income earned in the financial year 2015-16).

Note that everyone whose total income during the previous year – without claiming exemption – exceeds the threshold limit currently pegged at Rs 2.5 lakh (Rs 3 lakh for senior citizens) needs to file a return of income.

The first step in ensuring correct returns is to keep a tab on recent changes to the tax-filing rules.

-- Anyone who has a refund to claim and whose total income exceeds Rs 5 lakh (except super senior citizens) will necessarily have to e-file tax returns.

-- Under-construction property buyers are now allowed to claim a deduction of interest of upto Rs 2 lakh if the project is completed within five years (earlier, it was three years). Further delays reduce tax deduction to Rs 30,000.

-- Another change on the immovable property front is that the date of agreement fixing the amount during transfer would be considered to compute capital gains and not the date of registration, if payment has been made through non-cash modes.

-- To claim exempt agricultural income, you need to mention expenditure incurred too.

-- To claim capital gains tax exemption using Capital Gains Account Scheme, one would need to submit details such as previous year of transfer, exemption section, amount utilised out of capital gains schemes, year in which you purchased new assets, balance amount unutilised.

I use last year’s form

The rules on who can use which form are revised by the Income Tax Department based on the need to distinguish categories and information requirements. For instance, tax payers who have salary income and own more than one house property need to use a new form ITR 2A starting last year and not ITR 2.

This apart, your income earned last year may be different than that earned in 2014-15, so fill the correct form. “ITR -1 is not applicable if the agricultural income is in excess of Rs 5,000. In such case, ITR-2 is required to be filed by the taxpayer,” says Suresh Surana, founder of RSM Astute Consulting Group.

I can skip verifying Form 26 AS

Though taxes are deducted by employers and banks for interest, one must verify whether they are reflected in the Annual Account Statement or Form 26 AS before filing returns. Mismatches are the single largest cause of incorrect tax computation. “This year onward the assessing officer has been given the right to make suo moto adjustments to returns before assessment if some income is seen in Form 26 AS, but not declared in the return,” points out chartered accountant Paras Savla, stressing on the need to check Form 26 AS.

Tax cut, don’t mention

Individuals mistakenly believe that the income where taxes have already been deducted such as bank fixed deposit interest, EPF withdrawal before five years, etc. need not be reported as tax has been cut. But the calculations need to be based on your tax bracket as the TDS deduction rate might be different from your slab rate – 10/20/30%.

All interest up to Rs 10,000 exempt

The new exemption of up to Rs 10,000 on savings bank account interest is mistakenly understood to encompass FD interest too. However, one has to add the interest amount from fixed deposit to his/her own income and pay the applicable tax. Also, co-operative bank FDs and RDs too are liable for TDS deduction and one shouldn’t forget them.

I need not mention exempt income

There are incomes on which tax isn’t applicable such as stock dividends below Rs 10 lakh, savings bank interest below Rs 10,000, profits from shares held for more than one year and agricultural income. Though you don’t need to pay tax, you can’t ignore them. “There is a separate Schedule Exempt Income (EI) in the return of income wherein a taxpayer is required to report the details of exempt income,” adds Surana.

I can enter capital gains in any column

Exempt long-term capital gains should not be entered in capital gains section. Under short-term capital gains (STCG) many users confuse between STCG under section 111A and STCG others. As a result, the amount is entered against one another. This should be avoided as the resultant would be doubling of income from capital gains.

Spouse pays joint Home loan EMI, I claim

Joint owners of a house should claim tax benefits as per their share of the house. Co-owners who haven’t been paying the EMI cannot claim the interest and principal deduction. Similarly, rental income too should be shared in the proportion of ownership as the total income would shoot up if both mention the gross rental income.

Didn’t submit proofs, can’t claim

You can claim deductions even if you haven’t submitted proofs to the employer, but have invested the amount or made the relevant expense during the financial year. But it is quintessential to fill the specific schedules especially for 80 G, 80 IA and 80IB to claim the deduction, even if not submitted to the employer.

I need to mention one bank account

You need to fill not just one bank account detail for refunds, but fill in details of all bank accounts that you hold accept dormant accounts (inoperative for 3 years). “A taxpayer failed to disclose other bank account details. Later, when I-T officers found transactions through AIR (annual information returns), notice was issued and the taxpayer went through unnecessary hassle,” recollects Savla.

Check and cross-check personal details, especially bank account numbers. “There are taxpayers who often omit the initial zeros mentioned in their bank account number, which could lead to refunds being credited to erroneous accounts,” says Savla.

Task over after submitting returns

Many make the mistake of forgetting all about returns once submitted. But, returns aren’t considered valid untill they’re verified electronically using your mobile or email (only those earning below Rs 5 lakh), net banking account, ATM, demat account or the AADHAR No. or submitting a physically signed acknowledgement to the Bangalore CPC of Income Tax Department.

One can escape many hassles by giving the returns a careful read before submission and checking for these errors. However, if you realise that you have submitted an erroneous return, you have the option to revise it till March 31, 2018 or the completion of your return assessment, whichever is earlier.

“Disclose all income as the penalty provisions have changed and can stretch up to 200% of the tax evaded. The assessing officer has no power to reduce the penalty,” warns Savla.

But avoid using links in emails from fraudulent email IDs such asincometaxindia.gov.india@gmail.com or incometax.gov@yahoo.com to file returns. “Taxpayers are cautioned that they should not respond to such phishing mails and avoid downloading any attachment, which may contain a virus or malicious software,” CBDT has notified.

[Story contributed by KHYATI DHARAMSI | published in DNA Mumbai Edition ofTue, 26 Jul 2016-10:24am , on page 13]. It can be read at http://www.dnaindia.com/money/report-ten-tax-filing-myths-shattered-2238228

MAT on FII, FPI and Foreign Company in India

After Vodafone, another point tax officers have gone overboard is levy of Minimum Alternative Tax (MAT) on Foreign Companies / Foreign Portfolio Investors (FPI) / Foreign Institutional Investors (FII). Issue arisen due to revenue favourable ruling of Authority of Advance Ruling (AAR) in case of Castleton Investment wherein AAR has suggested levy of MAT on foreign Company. However in another three rulings - Timken, Fidelity and Royal Bank of Canada, AAR has ruled against revenue and in favour of tax payer. As per the provisions of Income-tax Act ruling of AAR is binding on the person who has sought it and not on any other person. Further Hon'ble Apex Court in way back in 1973 in case of Vegetable Products Ltd. has held that when two reasonable constructions of a taxing provision are possible, the construction which favours the assessee must be adopted. Hence the view taken by the tax authorities merely on the basis of the AAR ruling favouring Revenue is extremely aggressive. Considering the intention of provisions and language of the Section 115JB, levy of MAT on FPI, FII and foreign Companies seems incorrect interpretation. However one need to consider the amendment to the Section 115JB(2) made by Finance Act 2012.

Finance Minister has brought amendment in the Income-tax Act that not MAT on FPI w.e.f. April 1, 2015. While moving the amendment he pointed that in order to rationalise the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT. However he refrained from granting benefits for the past year. Post proposing this amendment, Stock Market reacted negatively. This led to series of clarifications by the Finance Minister as well as Minster of State for Finance. They have clarified that in case foreign investors are coming through treaty nations, they can avail of benefits from under tax treaties and it may not be subjected to MAT. Further in order to provide stable tax regime Government also set up A P Shah Panel.

During last week of July 2015 committee has delivered report to the Government. Government is yet to make the report public. From the press reports it is understood that the A P Shah Committee has recommended granting relief to such investors on MAT levy prior to April 1, 2015 and the government is favourably considering the committee’s recommendation. During the hearing in respect of Special Leave Petition filed by Castleton Investment in Supreme Court, Revenue sought time till September 29, 2015 to reply.

It is pertinent to note that majority of the MAT dispute cases are related to foreign companies and with respect to FPI. From the press report it is also understood that the revenue department did a faux pas by excluding foreign companies from the terms of references for the A P Shah panel. In case Government only exempt FPI or FII from MAT for prior years too, issue would not be put to rest for levy MAT on foreign companies. However, stock market which has tumbled to today may have good news for rejoice in case Government resolving MAT favourably for FII / FPI.

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)

The Fiscal Responsibility and Budget Management

The Fiscal Responsibility and Budget Management Act, 2003 (FRBM) was enacted by the Parliament of India to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget. The main purpose was to eliminate revenue deficit. In the presentation Indian and international history behind introducing FRBM Act and some of its provisions has been analysed. 
http://slidesha.re/NB6zGc