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2015: The Year That was

Published on Tue, Dec 29,2015 | 23:24, Updated at Tue, Dec 29 at 23:24Source : 

By: P N Shah, CA

GST Legislation
Before the year 2015 started, tax payers in India had high hopes about reforms in Tax Laws promised by the NDA Government. In his Budget Speech delivered on 28th February, 2015, the Finance Minister stated that Constitution Amendment Bill for levy of Goods and Services Tax (GST) has been introduced in the Lok Sabha. GST is expected to play a transformative role in the way our economy functions. He had suggested that all efforts will be made to bring GST legislation into force from 1st April, 2016. GST Bill was passed by Lok Sahba. However, many hurdles were created by some members of Rajya Sabha and the same could not be passed in Rajya Sabha in 2015. It is now deferred to the next session in 2016. Thus, it is clear that GST cannot be implemented on 1.4.2016. It is very unfortunate that this tax reform for consolidation of all Central and State Indirect Taxes e.g. Excise, Service Tax, Central Sales Tax, Vat etc., which is being discussed in our country for the last decade is being postponed on one or the other ground.

Direct Tax Code
Another important legislation, to simplify the provisions of the Income tax Act, which was under discussion in the form Direct Tax Code since 2009 has been unfortunately shelved by the present Government. Last year, the Finance Minister had suggested that Direct Tax Code Bill, 2010, which had lapsed will be revived after consultation with stake holders. This year, he had stated that now there is no need for revival of Direct Tax Code. Therefore, we will have to live with the present Income tax Act with so many sections, sub-sections, clauses, provisions, explanations etc and many different interpretations leading to unending litigation. It is rather unfortunate that, after spending over 5 years in discussion and deliberations in various meetings, seminars and conferences, we have lost the opportunity of having a simpler and tax payer friendly law.

Black Money Act
In its effort to address the issue about Black Money, the Parliament has passed “Black Money (undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, in the last Budget Session. In his Budget speech the Finance Minister has stated that the first and foremost pillar of my tax proposals is to effectively deal with the problem of black money which eats into the vitals of our economy and society. He has also stated that the problems of poverty and inequality cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully. Recognising limitation under the existing Income tax Act, he has stated that it is necessary to enact a comprehensive new law to specifically deal with black money stashed away abroad. The new law has come into force from F.Y. 2015-16 (A.Y. 2016-17).

This new law provides for levy of tax @30% and penalty @90% on the value of undisclosed foreign income and value of foreign assets. There are stringent provisions for penalty and prosecution. In order to give onetime opportunity to voluntarily declare foreign assets, the new Act provides for Voluntary Compliance Window for 3 months from 1st July to 30th September, 2015. During this period any tax payer who had not disclosed his Foreign Assets could disclose the same and deposit tax at 30% and penalty @ 30% on the value of such assets. It is reported that the response to this amnesty scheme was not upto the expectations of the Government.

Reading the provisions of this Black Money legislation, it can be stated that the provisions of the Act are very harsh and stringent. Very wide powers are given to officers administering this Act. In order to prevent misuse of these provisions in the cases of small assesses, the Act should have provided that no action under this new Act will be taken where the value of the foreign assets in the hands of the assessee does not exceed Rs. 1 Cr. Cases of such assesses can be dealt with under the provisions of the Income tax Act. The Finance Minister has stated before the Parliament that action under this Act will be taken only in case of big assesses who have evaded tax on a large scale by illegal transfer of Black Money outside India. However, the manner in which the provisions are made it appears that most of the small assesses will suffer due to ignorance and they will have to face the stringent penalty and prosecution provisions.

MAT on Foreign Companies
One major issue which was a cause of worry to the Finance Minister related to levy of Minimum Alternate Tax (MAT) on Foreign Companies, Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI). In view of the loud protest by Foreign Companies, half hearted attempt was made by amending section 115JB from A.Y. 2016-17. The larger issue of granting exemption from MAT provisions to such Foreign Companies could not be addressed in the Finance Act, 2015, in view of the promise by the Finance Minister that none of the provisions of the Income tax Act will be amended with retrospective effect. However, the issue was referred to Expert Committee under the Chairman of Justice A. P. Shah. The Expert Committee has now recommended that Section 115JB be amended retrospectively and exemption be granted to such Foreign Companies, who have no Permanent Establishment (P.E.) in India. The Government has accepted this recommendation and declared that Income tax Act will be amended with retrospective effect to grant this exemption. In line with the above, CBDT has recently issued a circular to all assessing officers to complete the assessments of Foreign Companies in accordance with the above Government decision.

Place of Effective Management
The amendment of section 6 of the Income tax Act, which is effective from F.Y. 2015-16, will affect a large number of Foreign Subsidiaries of Indian Companies. Prior to this amendment such foreign subsidiary was considered as resident in India if the control or management of its affairs was situated wholly in India. Now, with effect from 1.4.2015, such a company will be considered as resident in India if “Place of effective management” (POEM) is in India. What is POEM is not clearly defined and there are divergent views. Recently CBDT has issued Draft Guidelines which are to be finalized in January, 2016. These guidelines will create many more issues. Foreign Subsidiaries of Indian companies will have many practical difficulties in complying with this requirement if it is to be applied from 1.4.2015. Let us hope that this new provision is made effective from 1.4.2016 so that assesses and their advisors can know the full implication of this new concept.
Income Computation and Disclosure Standards
Section 145 of the Income tax Act was amended in 1995 to empower CBDT to notify Accounting Standards for computation of Income from Business or Profession and Income from other sources. Only two Accounting Standards were notified on 25.1.1996 effective from A.Y. 1997-98. These standards were on the same lines as AS-1 and AS-5 as issued by ICAI.

In December, 2010, CBDT constituted a committee to study Accounting Standards issued by ICAI and recommend Tax Accounting Standards (TAS) which can be notified by CBDT. This Committee recommended 14 TAS. Out of these, 10 ICDS have been notified by CBDT and made them effective from A/Y: 2016-17.

Accounting Standards issued by ICAI apply to all non-corporate assesses requiring to obtain tax audit reports and all corporate assesses. IND-AS notified under the Companies Act, 2013, will apply to certain companies as are notified. As compared to this, ICDS applies to all assesses having income from Business or Profession or Income from other sources if accounts are maintained on Accrual Method of Accounting.

It may be noted that the assessee will have to maintain its accounts in accordance with applicable AS or IND-AS as notified under the Companies Act. However, while computing Income from Business / Profession or Other Sources, it will have to consider provisions of ICDS. In the event of any difference, adjustment u/s 145 will have to be made in computation of Income. Reading the above provisions it will be evident that with the above 10 ICDS and many more to be notified by CBDT, the responsibility of tax advisors from this year will increase to a great extent as they will have to study ICDS and determine the impact of difference between ICDS and Accounting Standards followed by the assesses while preparing their accounts. The effect of such difference may be required to be reported in Tax Audit Report.

In the above article an attempt is made to take a bird’s eye view of some of the important developments on the tax front in India in 2015. This was the year when the Government has taken certain firm decisions to streamline the procedures and simplify some of the tax provisions. One such step is to abolish Wealth Tax from next year. Taxation is such a subject that one cannot expect absolute simplicity in drafting. However, so long as the Government is receptive to understand the hardships faced in the implementation of tax provisions and is ready to remove these hardships, we can appreciate its efforts. In this respect the Government desire to simplify our tax laws and to reduce litigation is evident from appointment of a committee headed by Justice R. Eshware to look into certain controversial provisions and suggest amendments so that tax law is simplified and litigation is reduced. Let us hope that this committee is able to make some suggestions in the direction which can be implemented in 2016.

This column is sourced from the year end series of Bombay Chartered Accountants' Society -

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