Tag: income tax

Tax department sends reassessment notices to global fund houses, BFSI News, ET BFSI

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The Income Tax Department has reopened old assessments of at least a dozen global fund houses and private equity funds alleging under-reporting of income through the misuse of tax treaties.

The department, in a communication last week, asked these fund houses to furnish details about the structure of their business, past investors and bank signatories, an official told ET.

The department has asked them to explain irregularities in computation of income for the assessment years 2013-14, 2014-15 and 2015-16, the official said.

Its early estimates peg income that allegedly escaped assessment at more than ₹300 crore, the person said.

The notices were sent after earlier explanations by the funds were found unsatisfactory by the department, which wants to look deeper into income statements and returns. The reassessment notices were issued under Section 148 of the I-T Act, which deals with income that has escaped assessment.

Under the rules, the tax department can go back up to 10 years to scrutinise past assessments if the concealment of income is ₹50 lakh and above.

Most Investments via Mauritius, Cyprus
“Most of these global private equity funds invested in India through Mauritius and Cyprus during these assessment years,” said the official. The department wants to know why these funds hadn’t invested directly but through a particular jurisdiction, he said.

The department reserves the right to reject a tax residency certificate (TRC) if it detects abuse of tax treaty benefits and treaty shopping. The Central Board of Direct Taxes (CBDT) didn’t respond to queries.

Most global funds channelled their investments in India via jurisdictions such as Mauritius and Singapore that allowed them to enjoy capital gains tax exemption. However, India amended the tax treaty with Mauritius effective April 1, 2017, withdrawing the exemption.

Capital Gains Tax
These funds are currently subject to capital gains tax. Private equity funds, which deal in unlisted companies, attract long-term capital gains at 10%, while short-term capital gain tax is levied at 30-40%.

Foreign portfolio investors (FPIs) that invest in listed companies attract long-term capital gains at 10% for equities sold on the exchanges, even if securities transaction tax has been paid.

Tax experts said the latest move could create uncertainty for investors. “Any fresh tax demands on such old investments could create challenges for fund managers because they may not be able to recover taxes and penalties from investors who might have already exited the fund,” said Rajesh H Gandhi, partner, Deloitte Haskins & Sells LLP.

Foreign investors have been hoping that, as a result of certain favourable court cases and specific protection under the General Anti-Avoidance Rule for investments made before 2017, past investments would not be challenged, he said.



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Tax Query: How to get TDS certificate from mutual funds?

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I have a few doubts with respect to my ITR for FY 2020-21 i.e. current AY 2021-22. I have invested ₹20,000 in Templeton India Equity Income Fund in 2006 under NFO. Since then periodical dividends declared under the scheme are getting credited to my savings a/c through ECS regularly and are accounted for in my ITR returns of the respective financial years. Since the Finance Act 2020 is modified and the dividends are now taxable in the hands of investors, the mutual fund has deducted TDS and paid the balance of the dividend to my savings account. Since I have not received Form 16 A for the TDS made by the mutual fund, I have sent a mail to the RTA of the MF. Initially, they have asked for a self-attested copy of my PAN card which I have provided to them. Now the RTA has replied that my PAN was not registered in FY2020-21 with them and was registered subsequently and hence, they are unable to fetch the TDS certificate for the FY2020-21. Since, the TDS was deducted on the dividend amount paid to me, kindly inform me how I can obtain TDS certificate and show them in my returns.

I also request you to kindly inform me how to show them in the current ITR in the absence of Form 16A.

Further, I am a retired pensioner and an amount of ₹15 lakh is invested in PMVVY Scheme and am receiving quarterly amount. Please clarify under what head should the amount be shown. Apart from my pension, during the year I have incomes including interest on bank deposits, dividend income from shares and MFs, interest income from NCDs, sovereign gold bonds, savings bank A/c, infra bonds, interest on NHAI tax-free bonds and short term & long-term capital gains. I have one self-occupied house property. My total income during the year is less than ₹50 lakh and I do not have any agriculture income. In the light of the above, I request you to kindly inform me which ITR return I have to file?

Rama Krishna

Dividend shall be taxable under the head ‘Income From Other Sources’ (IFOS) as per the Act. If your PAN is available with brokerage company/fund manager, the taxes deducted would be reported in your Form 26AS based on which the TDS credit can be claimed in the tax return. Where the company has not deposited the TDS/filed the TDS return, due to absence of your PAN details, you are required to complete the KYC formalities and provide the scanned copy of PAN to enable them to do the needful.

Pension income earned from Prime Minister Vaya Vandana Yojana Scheme (PMVVY) of LIC of India is fully taxable and shall be reported under the head IFOS. Please be informed that bank interest, dividend income from shares/mutual funds, interest income from infrastructure bonds, NCDs and sovereign gold bonds shall be taxable under the head IFOS. Short term capital gain/long term capital gain on sale of shares needs to be reported under the head capital gains.

Considering your income pattern, you are required to file ITR 2 for the FY 2020-21.

In the issue dated September 5, 2021, you have mentioned that if money is gifted to relatives, any interest earned out of that will be taxed in the hands of the recipient only. In a similar manner If shares allotted in an IPO are gifted to spouse, and if they are sold within a period of one year, will the short term capital gain be taxed in the hands of the recipient of the gift? If yes, what sort of record should be kept?

Niranjan

Your spouse is not required to pay any tax on receiving shares from you as a gift. However, Section 64(1)(iv) of the Act provides for clubbing of income in the hands of the transferor when assets are transferred for inadequate consideration. Providing gifts to your spouse would amount to transfer for inadequate consideration. Accordingly, any gains arising from sale of such shares is taxable in your hands. Besides documentation evidencing cost of acquisition of shares, sale consideration, selling expenses, etc., and documentation related to gift (like gift deed) needs to be kept on record.

The writer is Partner, Deloitte India

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Tax Query: Is tax audit needed for claiming loss from F&O trading?

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Please let me know whether tax audit u/s. 44AB read with section 44AD is applicable for A.Y. 2021-22, for claiming loss from futures & options (derivatives) business of ₹1 lakh on turnover of ₹5 lakh and interest income of ₹7 lakh? Also, how to carry forward unabsorbed loss under ‘income from house property (self occupied)’ where interest on home loan exceeds ₹2 lakh as the system ignores excess interest while uploading ITR-3?

Tina B

For the purpose of analysing the applicability of tax audit requirement u/s 44AB of the Income-tax Act, 1961 (‘the Act’), the turnover is required to be determined. As per the guidance note on tax audit issued by the Institute of Chartered Accountant of India, turnover in case of dealing in futures and options shall include the following:

a) Total of favourable and unfavourable differences

b) Premium received on sale of options

c) In respect of any reverse trades entered, the difference thereon

As per the provisions of Section 44AB every person, carrying on business shall be required to get his accounts audited for such financial year by a Chartered Accountant before the specified date, if total sales, turnover or gross receipts (as applicable), in business exceed ₹1 crore in any previous year. The said limit of ₹1 crore is substituted with ₹10 crore in case the cash receipts do not exceed 5 per cent of the total sale/ turnover/ gross receipts and the cash expenditure does not exceed 5 per cent of the total payments.

As per the provisions of Section 44AD , in the case of an eligible assessee engaged in an eligible business (turnover not exceeding ₹2 crore and not into the business of plying, hiring or leasing goods carriages), a sum equal to 8 per cent (6 per cent in respect of amount received by way of A/c payee cheque/ A/c payee bank draft/ electronic clearing system) or a sum higher than the aforesaid sum shall be deemed to be the profits and gains of such business chargeable to tax under the head “profits and gains of business or profession”.

As per the guidance available on portal of income tax department, a person can declare income at lower rate (i.e. at less than 6 per cent or 8 per cent), however, if he does so and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB. In the instant case, since the income (being loss) from Future & Options is less than 8 per cent / 6 per cent and the total income chargeable to tax is exceeding the maximum amount not chargeable to tax, you would be required to be audited u/s 44AB of the Act .

Carry forward of unabsorbed loss on account of interest on housing loan: As per the provisions of Section 24(b), deduction on account of interest on housing loan in case of a self-occupied property is restricted to ₹2 lakh and hence loss under house property for a self- occupied property cannot exceed ₹2 lakh. Accordingly, any interest paid in excess of ₹2 lakh is neither eligible to be set-off against other heads of income nor allowed to be carried forward for future assessment years. Hence in the instant case, interest paid in excess of ₹2 lakh, shall not be allowed to be carried forward to the future assessment years.

The writer is a practising chartered accountant

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No objection certificate from IT dept not required for voluntary liquidation: IBBI

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Insolvency regulator IBBI has clarified that an Insolvency Professional (IP) handling voluntary liquidation process will not be required to seek any No Objection Certificate (NOC) or No Due Certificate from the Income Tax department for compliance with any such process.

Th position was laid down in a circular by the Insolvency and Bankruptcy Board of India (IBBI) which held that the process of applying such NOC/NDC from the IT Department is time-consuming and defeats the objective of time-bound completion of process under the Insolvency and Bankruptcy Code (IBC), the IBBI said.

Currently, the voluntary liquidation regulations mandates the liquidator to make the public announcement within five days office appointment, calling for submission of claims by stakeholders within 30 days from the liquidation commencement date. The regulations also obligate all the financial creditors, operational creditors including government and other stakeholders to submit their claims within the specified period. If the claims are not submitted in time, the corporate person may get dissolved without dealing with such claims and such claims may consequently get extinguished.

It has been noticed that even after providing an opportunity for filing of claims, the liquidators seek NOC/NDC from the income tax department despite the fact that the code or the regulations do not envisage seeking such NOC/NDCs.

Experts’ take

Yogendra Aldak, Partner, Lakshimkumaran and Sridharan Attorneys, said “It brings necessary assurance to the stakeholders and makes sure that the stakeholders are not required to comply with a procedure not contemplated under the Code.”

Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas and Co, said “ Negating the practice of seeking a NOC/NDC from the IT department would operationally ease the process of voluntary liquidation. The liquidators can strike off this requirement from their checklist of obligations.”

Maneet Pal Singh, Partner, I.P. Pasricha & Co, said that in recent times we have seen that the objective of time-bound completion of liquidation process gets defeated primary due to the process of obtaining NOC from the Income Tax Department by the Insolvency Professional since that consumes substantial amount of time against the express provisions of the Insolvency and Bankruptcy Code, 2016.

“In order to tackle the same, the IBBI clarified that an Insolvency Professional handling voluntary liquidation process is not required to seek any NOC from the Income Tax Department and with this we believe that the process will be handled smoothly in a time bound manner”, Singh said.

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Fresh tax notices to FPIs over capital gains, BFSI News, ET BFSI

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The I-T department has asked multiple foreign portfolio investors (FPIs) to cough up more taxes on their capital gains after denying set-off and tax treaty benefits, people aware of the development said. The notices were issued by the Centralised Processing Centre (CPC) of the I-T department under Section 143(1) of the Income-tax Act.

The intimation under Section 143(1) informs taxpayers about initial assessments carried out by the tax department and points out discrepancies in tax filings, and demands additional taxes, if any.

Intimations demanding additional taxes primarily cited three reasons, the sources said. Either the FPIs have been disallowed to set off long-term capital gains against short-term capital losses, or the tax department has not taken tax treaties into consideration, or, in some cases, it has categorised short-term capital losses incurred by FPIs as gains, they claimed.

Many tax experts suspect that this could just be a technical glitch in the system, but even so the FPIs will now have to approach either the Commissioner of Income Tax (Appeals) or litigate the matter.

“The law allows long-term capital gains to be set off against short-term capital losses,” said Rajesh H Gandhi, partner at Deloitte India. “If such set-offs are denied, it could result in significant tax demands for FPIs, requiring them to litigate the matter. Hopefully this is a technical glitch and would be rectified soon.”

In other cases, the tax department has not taken tax treaties into consideration while demanding tax from FPIs. All FPIs that are covered by India’s bilateral tax treaties and attract much lower taxes – of 10% to 15% – than if they are not protected through tax treaties.

In several other cases, the tax department has categorised short-term capital losses incurred by FPIs as gains, sources said. So, instead of getting deductions on such amounts, they have been asked to cough up taxes.

“Taxpayers have raised concerns with respect to the Centralised Processing Centre erroneously treating short-term capital loss as short-term capital gains and taxing the same,” said Sameer Gupta at EY India. “There have been other issues, too, around gains which were subject to tax at 50% of the domestic tax rate,” he said.

“The remedial measures adopted by taxpayers for the above include filing of rectification application and also parallelly seeking recourse through an appellate process,” Gupta said. ET could not independently verify whether the tax notices were a result of a technical glitch or change in stance or any other issue related to FPIs. An email query sent to the CBDT and the FM did not elicit any response as of press time Thursday.



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Tax Query: Do early retirees have to pay advance tax?

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I retired early at the age of 50. The only sources of my income are capital gains from mutual funds and stocks, and interest income. Do I have to pay advance tax?

Vijaya Kumar

As per the provisions of Section 208 of the Income-tax Act, 1961 (‘the Act’), every person whose tax liability (after considering the Tax paid viz. Tax deducted at Source / Tax Collected at Source, if any, for your case) on the estimated total taxable income, for the Financial Year (FY) exceeds ₹10,000, is required to pay taxes in advance in 4 prescribed quarterly instalments —June 15, Sep 15, Dec 15 and March 15 during the said FY.

As per Section 207 of the Act, Resident individuals who is of the age of 60 years or more and not having income under the head Profits and Gains of business and profession’ are not required to pay advance taxes.

Advance tax is required to be paid on capital gains. However, as one cannot estimate the exact capital gain in advance (unless it actually materialises), hence if taxpayer has made any capital gain after the due dates of advance tax instalment, then such tax liability is required to be paid in remaining instalments. Interest for shortfall in payment of advance tax on account of capital gains would not be applicable for the previous instalments.

In case you estimate the total tax liability on your estimated taxable income (Capital Gains and Interest) to exceed ₹ 10,000 (after considering the tax deductible/collectible at source), you would be required to pay taxes by way of advance tax in the four prescribed instalments.

The writer is a practising chartered accountant

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Know the key points about new tax regime

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Getting ready to file your income tax return for the fiscal 2020-2021 (AY 21-22)? You must be aware that from this year onwards, there is an option to choose between the old tax regime and a newer one, which offers low tax rates but without the benefit of most deductions and exemptions.

There is no one size fits all solution to which regime will be more beneficial. The suitability for each individual is based on the exemptions and deductions that one is availing in the old tax regime.

Here are key points to note about the new tax regime before you make the choice.

Exemptions available

When opting for the new regime, needless to mention, one has to forego most of the deductions/exemptions including those under section 80C (maximum of ₹1.5 lakh) that can be claimed by investing in specified financial products, section 80D for health insurance premium paid, 80TTA for deduction on savings account interest earned from a bank; exemption for house rent allowance and leave travel allowance.

However, there are some categories still eligible for exemption under the new tax regime; subject to same conditions that have been applicable under the old tax regime.

The withdrawals from the long-term investment products- Employee Provident Fund (EPF) after five years, Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY) and from National Pension Scheme (NPS) up to 60 per cent of the proceeds falls under exemption category in the new tax regime as well. Further, employer contribution to the NPS/EPF account which are exempt in the hands of employees in the old tax regime will get the same benefit even in the newer tax regime. Even the interest from EPF (up to 9.5 per cent), PPF and SSY continue to be exempted in the lower tax structure. Ditto with interest earned on savings account from post-office.

Similarly, gratuity received (after five years of service) and the amount received under Voluntary Retirement Scheme (VRS) from employer on termination -subject to conditions – will not attract tax under both the tax structures. Leave encashment too is eligible for same tax break, irrespective of the tax structure you choose.

Responding to tax queries related to perquisites from the employer to perform official duties under the new tax regime, the government has clarified that any amount received as reimbursement for the cost of travel, daily expenses on transfer, tour allowance for travel for official purposes and conveyance allowance for meeting conveyance expenditure incurred in course of performing official duties will be tax-exempt. It has also clarified that the food coupons received by an employee who has opted for the new tax regime will be taxable in her/his hands.

Further, maturity proceeds from life insurance policies come under the exempt category.

As mentioned, the conditions applicable for the said categories to be eligible for exemption in the old tax regime will be applicable under the new tax regime as well. For example, exemption on gratuity received, which is limited to least of – a) last salary*number of years of service*(15/26) b) ₹20 lakh and c) actual gratuity received – under the old tax regime, will still continue to be applicable for gratuity payments to those opting for the new tax regime.

 

When to choose

If you are a salaried employee, you would have already received a communication from your HR department in early FY21 asking your preferred tax regime for the year. But you can definitely change your mind after that. The intimation given to the HR is only for the TDS purposes. Anybody – salaried or unsalaried – can opt for whatever tax structure they wish to while filing the return for FY21, which is due this year by December 31.

If you decide to go for the new tax regime and have income from business or profession, you also need to file Form 10IE – that requires digital signature or e-verification through the income tax portal, before filing your income tax return . If you don’t, the income will be taxable as if the new regime was not selected.

Option to switch

If you don’t have income from business or profession, you can choose a suitable regime every year. Resultantly, you can switch from one tax regime to another based on your income levels and the eligible exemptions and deductions.

For those having income from business or profession, the option of new tax regime, once selected will be applicable to the subsequent assessment years as well. But if he/she wants to withdraw from the scheme, they can do so only once. Thereafter, the person will never be eligible to exercise the new tax regime option until he/she ceases to have income from business or profession.

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How is Covid related financial relief granted by employer taxed?

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It is vital to know the tax treatment for money received for treatment, ex-gratia to family in case of death of employees

The pandemic had created significant havoc in the lives of the people. Corporates, charities and well-wishers have shown compassion towards the affected people by contributing in various forms. However, this act of humanity has its uncertainty from an income-tax standpoint. The government was gracious enough to take cognizance of a few uncertainties and issued a press release dated June 25, 2021 to clarify the taxation standpoint on some accounts. These reliefs are subject to an amendment to the Income Tax Act, though. Against this backdrop, we have discussed few nuances concerning Covid relief and the press release of the government. The imaginary conversation between Yaksha and Yudhishthira explains some aspects.

Yaksha – Hi Yudhi, is the money received from an employer/others for medical treatment taxable?

Yudhishthira – Medical reimbursements provided by the employer for a prescribed ailment in an approved hospital will not be treated as a taxable perquisite. However, Covid-19 is not a prescribed ailment/disease to date under Rule 3A(2). Therefore, the reimbursement could be treated as a perquisite. To address this concern, a press release was issued to clarify that any amount received from an employer for medical treatment due to Covid-19 will not be subject to tax in the hands of employees. This relief mentioned in the press release does not differentiate between employees opting for the old or new taxation regimes.

For amounts received from anyone other than employers, Sec. 56(2)(x) (a.k.a “Gift Tax”) taxes the recipient if the aggregate amount exceeds ₹50,000 in a year (excludes receipts from prescribed relatives). Therefore, there was a question about what would happen if a person received money for medical expenses beyond the limit. Would it trigger taxation ? The press release has clarified that receipt for Covid-19 treatment will not be subject to tax.

Yaksha – Does the relief mentioned above include assistance in financial and non-financial forms?

Yudhishthira – The non-financial assistance from the corporates/charities include donating oxygen cylinders, ventilators, ICU Beds, testing kits, medicines, etc. The press release has addressed only financial aid by employers to employees or their family members and is silent on non-financial assistance.

Yaksha – Is the vaccination cost of the employer and their families also covered under medical treatment?

Yudhishthira – Sec.17(2)(iii) r.w. Rule 3A(2) refers only to reimbursement of medical treatment, and there is an apprehension that vaccination is only preventive care. Therefore, vaccination costs could be treated as perquisite. However, one can refer to Section 80D, wherein the deduction for health insurance premium is granted to preventive health check-ups up to a specific limit. We need to see what happens on this front.

Yaksha – Can you explain the taxability of gratuitous payment received by the deceased family from the employer or others?

Yudhishthira –Sec. 56(2)(x) is equally applicable in this situation. To relieve the grieving families, the press release has clarified that the exgratia paid by the employer to the deceased family is fully exempt. If the exgratia is received from a person other than an employer, the amount is exempt up to ₹10 lakh.

Yaksha – For which financial year(s), is the relief proposed for taxpayers?

Yudhishthira – The press release had mentioned relief for the Financial Year 2019-20 and subsequent years. The timeline for filing original/revised/belated return of income for the FY 2019-20 has already expired, and the taxpayers would have filed the return taking a specific position on the taxability of various assistances. For FY 2020-21, the return filing deadline is extended to December 31, therefore the press release could be relied on. Taxpayers are advised to maintain sufficient documentation to support the relief are received towards Covid-19 medical expenses.

Yudhishthira – Yaksha, the agony that the family and the employees felt on Covid-19 is unfathomable. The tax consequences, if any, will only add to such agony. The government somewhat addresses this aspect in the press release, as you say. But one has to wait for the actual amendment to see whether the above aspects are addressed in the law per se, right?

Yaksha – That’s right.

Mukesh Kumar is a partner at M2K Advisors

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Tax Query: How to calculate capital gains tax set off and carry forward loss

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For FY 2020-21 income tax returns, I have to report under the head capital gain/loss: (a) Sale of domestic debt mutual funds – short term capital gain of ₹14,892, long term capital gain with indexation of ₹1,30,250 (b) Sale of domestic equity mutual funds – long term capital gain of ₹31,044, long term capital loss of ₹99,509 (c) Sale of foreign non-equity mutual funds – short term capital loss of ₹1,21,630 (d) Sale of domestic unlisted equity shares – long term capital loss of ₹31,635. Kindly explain to me the computation of capital gains tax set off and carry forward loss as applicable.

Srishyla Melkote V

I understand that the capital gain / loss as mentioned in your query above, has been calculated after taking into account the appropriate provisions of the Income-tax Act, 1961 (‘Act’). As per the provisions of Section 71 of the Act, losses under head capital gains can be set-off against income under the head capital gains only. Further, as per the provisions of Section 70 of Act, short-term capital loss can be set off against long-term or short-term capital gain. However, long-term capital loss can be set off only against long-term capital gains. Please find below computation of income chargeable under the head capital gains.

Further, as per the provisions of Section 74 of the Act, loss under the head capital gains to the extent not set off in the FY can be carried forward to eight years immediately succeeding the year in which such loss is incurred. Carried forward short-term capital loss can be set off against long-term or short-term capital gain. However, carried forward long-term capital loss can be set off only against long-term capital gains. In the instant case, you have net short-term capital loss which can be carried forward to eight years i.e. upto FY 2028-29 to be set off against short-term or long-term capital gain, for those years. Further, it is pertinent to note that capital loss can be carried forward only if the return of income for the concerned subject year is furnished on or before the due date of filing of original tax return under section 139(1) of the Act. The extended due date, as of now, for filing the income tax return for FY 2020-21 is 30 September 2021 (for cases where no audit is required to be done under provisions of section 44AB of the Act).

I am working in a private company and fall under 20 per cent slab. I own a small quantity of shares in 30 odd companies and received ₹12500 as dividends. What will be the tax implication?

V. Ganesa Moorthy

Finance Act 2020 has shifted the taxability on dividend income from the hands of the company declaring the dividend to the individual investors. The taxability of dividend and tax rate thereon depends upon factors like residential status of the shareholders, nature of activities of shareholder (whether dealing in securities, salaried individual, etc. to determine nature/ head of income). In case of a non-resident shareholder, taxability of dividend income / tax rates are to be seen in light of the provisions of respective Double Taxation Avoidance Agreements (DTAAs), if applicable. Since, you are a salaried employee and are not engaged in dealing with securities, the dividend income would be considered as “Income under the head other sources”. Further, assuming you would qualify as a resident in India, dividend income received shall be subject to tax at the rates applicable you i.e. 20 per cent (plus health and education cess at 4 per cent).

The writer is a practising chartered accountant

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