Every year the Indian Budget witnesses several modifications in tax provisions with the insertions of new provisions, deletion/modifications of old provisions. However, when one reads the fine print, it appears that many amendments could sometimes have far-reaching consequences.
Amendments introduced with retrospective effect are becoming more frequent in the budget proposals every year. This is primarily done to neutralize the position settled by the courts and get over adverse decisions against the tax department.
A few such retrospective amendments proposed in the recent Finance Bill 2009 are discussed below.
Section 80A of the Income-tax Act (dealing with deductions on account of tax holidays)
The Finance Bill proposes to retroactively introduce in section 80A of the Act with effect from 1 April 2003, a stringent requirement whereby an assessee to avail certain tax holidays (such as under section 80IA, 80IB, 10A, 10B etc.) would be required to make a specific claim for the same in the return of income. A failure to do so in the return of income for the respective assessment year (AY) would disentitle such an assessee to a legitimate claim.
By virtue of such an amendment and that too retroactively, it could possibly negatively impact many taxpayers for genuine tax benefits available to them.
This proposal if enacted, is very harsh on taxpayers who had legitimate claims for a tax holiday, but the same were erroneously or otherwise not made in the return of income.
Another proposal in the Finance Bill is to amend the provisions of section 147 of the Act (dealing with reassessment of income) with effect from 1 April 1989. Under the existing provisions of the Act, the tax authorities wanting to reassess the income of the assessees could do so within the prescribed time limit by recording the reasons/grounds on the basis of which the assessment is proposed to be reopened. Typically, the scope of reassessment could not extend beyond the reasons provided for undertaking the reassessment. This was supported by judicial decisions in Jay Bharat Maruti Ltd v. CIT and CIT v. Ram Singh.
However, the Bill proposes to retrospectively amend section 147 to provide that the tax authorities while making reassessment under section 147 can make any other addition which comes to their notice. By virtue of this proposal, the ratio laid down by the high court decisions would become nullified and the tax authorities would have a free hand to frame assessment. This seems to be a sweeping carte blanch and that too with retrospective effect.
Another important retrospective amendment proposed by the Finance Bill is to amend section 115JB of the Act (dealing with computation of books profits and payment of minimum alternate tax, or MAT).
Under the existing provisions of MAT, an assessee has to compute its book profit after making certain adjustments (i.e. additions/reductions) which interlaid include addition on account of provision for unascertained liability. In the past, assessees making provisions such as for doubtful debts were taking the view that the said provision is against debtors (i.e. assets) and not against any liability. Hence, the same was not added back while computing book profits. The said view was also affirmed by the Supreme Court in CIT v. HCL Comnet System and Services Ltd.
To reverse the aforesaid interpretation, it is proposed in the Finance Bill to amend provisions of section 115JB with effect from 1 April 2001 (i.e., AY 2001–02) to provide that book profits are to be increased by “the amount or amounts set aside as provision for diminution in the value of any asset”.
The scope of this proposed amendment is wide that by use of words “any asset” it could cover not only provision made for doubtful debts but also provision made for diminution in value of any investments, tangible/intangible asset.
The consequence of such a proposal could be such that the tax authorities could reopen completed assessments subject to prescribed cap in reassessment provisions on time limit for doing so.
The Finance Bill has proposed to introduce certain new compliance and procedural provisions. Typically, such compliance and procedural provisions increase the cost of tax compliances.
However, these proposed provisions could not only increase the cost of tax compliance but also increase the cost of business.
The Finance Bill proposes to insert section 206AA in the Act whereby it becomes mandatory for all deductees in respect of whose income any tax is deductible to obtain and provide their permanent account number, or PAN, to the deductors. If they don’t, the deductor would be required to withhold taxes at incremental tax withholding rate which is proposed to be higher of the following:
•Rates specified in relevant provisions of the Act; or
•Rate or rates in force (treaty rates or rates provided in the schedule to Finance Act, whichever is beneficial); or
•Rate of 20%
The consequences of such a provision, if enacted, would be far-reaching, especially with respect to payments to non-residents.
The Finance Bill proposes to insert a new section, section 282B with effect from 1 October 2010 in the Act which provides that every income-tax authority shall allot and quote the computer-generated document allocation number or DIN in each correspondence sent by it to any assessee/any other income tax authority.
Though the provisions also provide that a DIN would need to be quoted in all correspondences filed by the assessee with the tax authorities, the provision appears not to be clear as to the source from where the assessee could procure the DIN to be quoted in the correspondence.
Though the DIN is a welcome step to track any communication with/within the department, there is lack of clarity regarding the methodology/system to number the numerous receipts of letters/submissions filed by the assessee with various tax authorities of same/different jurisdiction.
Further, if not implemented appropriately, this could be a matter of concern for the tax payer since the law provides that any document/correspondence which does not bear the DIN, then such letter/document or any correspondence shall be treated as invalid and shall be deemed never to have been received.
While the Budget has proposed many retrospective amendments (which affects taxpayers negatively), a beneficial amendment made in the computation of tax holiday benefits (made due to an anomaly) has been introduced prospectively.
It also appears that sword of reassessment is hanging on corporates and may strike any moment the retrospective amendments get enacted. Some of these cumbersome Budget proposals if enacted will saddle the taxpayer with increased compliance and tax cost.
Hence, before enacting the budget proposals, the finance minister could reconsider enacting these retroactive amendments.
Ketan Dalal is executive director and Manish Desai is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome at firstname.lastname@example.org