Finance
Bill 2017- Critical analysis of Direct Tax Provisions
1. Capital gains – Joint Development
Property
a)
Finance Bill 2017, propose section 45(5A) which
provide for the time of taxability of capital gain
arising on transfer of land or building,
contributed by an Individual or HUF, in Joint Development agreement.
b)
The salient features of Section 45(5A) are as
under;-
i)
Section 45(5A) supersede section 45(1), thus
providing an exception that capital gains will not be chargeable in the year of
Transfer.
ii)
Capital gains will be taxable in the year in
which property or part of the property under joint development gets completion
certificate
iii)
The sales consideration will be stamp duty value
(of year in which property gets completion certificate) of share of property attributable
to Individual or HUF and cash consideration if any.
iv)
Thus transfer will take place in earlier year
and computation and taxability will be in posterior years.
c)
Critical
analysis – In case of Long term capital Gains, of which year Cost inflation
index will be applicable i.e year of Transfer or Year of Computation, as Section
48 prescribe that for Calculating Indexed Cost, Cost Inflation index (CFI) of
the year of Transfer be taken. Exemplified
as under:-
i)
Cost of land Contributed in JDA – Rs. 10 lacs (Acquired in year 2013-14, CFI - 939)
ii)
Year of Transfer – 2017-18 (Stamp duty value –
Rs. 30 lacs, CFI assumed - 1200)
iii)
Year of Computation
& Taxability (property gets completion certificate) – 2020-21
iv)
During 2017-18 and 2020-21, there is huge run up
in inflation and as a result thereof property price and Cost inflation index
also goes up substantially (by 50%)
v)
Capital gain Computation in two scenarios are as
under;-
|
Particulars
|
Units
|
Cases
|
|
|
CFI -
Year of Transfer
|
CFI -
Year of Taxability
|
||
|
CFI
|
Nos
|
1200
|
1800
|
|
Consideration
|
Rs
lacs
|
45
|
45
|
|
Cost
|
Rs
lacs
|
10
|
10
|
|
Indexed
Cost
|
Rs
lacs
|
12.78
|
19.17
|
|
Capital
gain
|
Rs
lacs
|
32.22
|
25.83
|
vi)
On parity principles, CFI should be taken of the
year of which Stamp duty value is taken as sales consideration, otherwise
assessee would be required to pay more taxes.
2. Cost of Acquisition of share of
developed Property under JDA
a)
Section 45(5A) provides that in JDA, the sales
consideration for land/building transferred in JDA, will be aggregate of following
two:-
i)
Stamp duty value (of the year of Completion) of
Individual’s share in Developed Property and
ii)
Cash Consideration, if any.
b)
Propose section 49(7) provides for cost of
acquisition of Individual share in developed property received in JDA. It read
as under;-
“Where
the capital gain arises from the transfer of a capital asset, being share in
the project, in the form of land or building or both, referred to in
sub-section (5A) of section 45, not being the capital asset referred to in the
proviso to the said sub-section, the cost of acquisition of such asset, shall
be the amount which is deemed as full
value of consideration in that sub-section”
c)
The Cost of acquisition of share in developed
property should be only stamp duty value taken as sales consideration earlier and
should not include the cash consideration received.
d)
Illustrated
i)
Cost of land Contributed in JDA – Rs. 5 lacs
ii)
Stamp Duty Value of Individual share in Developed
Property – Rs. 15 lacs
iii)
Cash Consideration – Rs. 2 lacs
iv)
Thus as per section 45(5A), the full consideration
is Rs. 17 lacs
v)
Further as per section 49(7), the cost of acquisition
of Share in developed property is Rs. 17 lacs, which is not factually correct.
vi)
The cost of acquisition of Share in Developed
Property should be Rs. 15 lacs , taken as sale consideration earlier, rather
than Rs. 17 lacs.
3. Double Taxation – Interplay of Section
Propose section 50CA and 56(2)(x)
a)
Section 50CA provides that on transfer of unquoted
share of company, being capital asset, if sales consideration is less than FMV,
to be be prescribed, then FMV shall be deemed as sales consideration
b)
Section 56(2)(x)- Among other things, said section
provides that if person receives any property (Including unquoted shares in
company) at value less than FMV, then excess of FMV over such value will be
deemed as income of recipient of shares.
c)
Assuming the FMV as per section 50CA is on same
basis, as prescribed for section 56(2)(x), then there will be double taxation
of same amount in the hands of two assessee.
d)
Demonstrated
i)
Mr. A sold unquoted shares to Mr. B at Rs. 1
lakh, at cost to him and the FMV being 1.7 lacs.
ii)
As per section 50CA, Rs. 70,000 (1.7 lacs – 1.00
lacs) will be capital gains in the hands of Mr. A.
iii)
As per Section 56(2)(x), same Rs. 70,000 will be
taxable in the hands of Mr. B, as he paid less than FMV for acquiring the
shares.
4. Section 56(2)(x) – Impediment in
restructuring stated in section 47.
a)
Among other things, section 56(2)(x) provides
that, if a company or firm receives any Immovable property or shares &
Securities (Listed or unlisted) or other specified properties (Capital asset)
at value less than FMV, then excess of FMV over such value be deemed as Income
of said company or firm.
b)
Section 56(2)(x) provides its non-applicability
in case of merger and demerger, however
following types of restructuring is not covered in exclusion scope of section
56(2)(x)
i)
Transfer of capital asset by Holding to Wholly
owned Subsidiary or vice versa, referred to in section 47(iv) & 47(v)
ii)
Any transfer of Capital asset by a firm to
company, referred to in section 47(xiii).
iii)
Any transfer of capital asset by Company to LLP,
referred to in section 47(xiiia)
iv)
Any transfer of Capital asset by sole proprietorship concern to company,
referred to in section 47(xiv)
v)
Contribution of listed shares as capital by partner
in Firm at less than FMV.
c)
Typified
i)
Holding Company is having land of Rs. 5 lacs,
FMV being Rs, 50 lacs
ii)
It transferred the same to wholly owned
Subsidiary at cost, with an objective to develop real estate project in
separate entity.
iii)
The holding company is not subject to capital
gain, as the said transaction does not amounts to transfer u/s 47(iv) but now
u/s 56(2)(x), subsidiary will be made taxable on Income of Rs. 45 lacs, the
excess of FMV over consideration paid for acquiring the land.
5. Thin Capitalization Provision
a)
Though propose section 94B, thin capitalization
rules are intended to be introduced in India.
b)
Section 94B provides as under;-
i)
An Indian company or Permanent establishment
(PE) borrow money from its foreign company, being an associated enterprise
ii)
The amount of Interest, on said borrowing, which
is eligible for deduction under computing PGBP, exceeds Rs. 1 Cr.
iii)
In above situation, the interest eligible for
deduction under PGBP will be restricted to 30% of EBITDA or actual amount of
Interest, whichever is less.
iv)
The Interest not allowed as afore-said will be
carried forward to next year and such carried forward is allowed upto 8th
assessment years.
c)
The thin capitalization provisions in its
current propose setting may not be able to pass the test of Non-discrimination
Rule under Article 24 of OECD Model Convention of DTAA.
d)
Article 24(4) of OECD model reiterates as under:-
“Except where the provisions of paragraph
1 of Article 9, paragraph 6 of Article 11 or paragraph 4 of Article 12 apply,
interest, royalties and other disbursement paid by an enterprise of a contracting
state to a resident of the other contracting state shall, for the purpose of
determining the taxable profits of such enterprise, be deductible under the
same conditions as if they had been paid to resident of first-mentioned state”
e)
Let analyses the provision of article 24(4)
i)
It prohibits the discrimination against
deduction of expenditure, paid to foreign enterprise , in the hands of resident
enterprise, where such deduction would have been allowable, had payment being
made to other resident enterprise in similar conditions
ii)
The said discrimination is prohibited only when
same is also forbidden by Article 9.
iii)
The OECD Commentary on Article 9 permits the
application of Thin Capitalization rules in domestic legislation, provided the
same does not have the effect of increasing the taxable profits of relevant
domestic enterprise to more than Arm’s Length Profit.
f)
Analysis of Section 94B vis-à-vis Article 24 and
Article 9
i)
Restriction of Interest expenditure upto 30% of
EBITDA, paid to Foreign associated enterprise is discrimination, whereas
similar expenditure to any extent is allowed when same is paid to other
domestic enterprise. – Article 24(4) will prevent such discrimination
ii)
The criterion of restricting Interest paid to
foreign associated enterprise upto 30% of EBIDTA may have effect of taxing the
profit of Domestic Enterprise at more than Arm’s length level profit, as
comparable enterprise may have allowable interest expenditure in excess of said
30% range.- Article 9 will prevent such taxation of profit at more than Arm’s length
level
iii)
Thus Thin Capitalization Provisions u/s 94B may
not have desired impact in view of non-discrimination provision of Article
24(4).
