COVID 2019: Relaxation from Statutory and Regulatory compliances

From Yatin Sharma‘s  desk with Astha Srivastava and Sayli Petiwale

These unprecedented times call for unprecedented measures. As one of the first steps taken by the Government of India (“GoI”) to counter the impact of COVID -19 on the economy, the Union Finance & Corporate Affairs Minister on March 24, 2020 announced certain relief measures with respect to statutory and regulatory compliance matters across various sectors. Further, relief in the area of taxation — both direct and indirect have also been announced. This note provides a short summary of the various measures.

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Corporate Affairs

Under the Companies Act, 2013 (“CA, 2013”)

  • A moratorium period has been introduced from April 1, 2020 to September 30, 2020, whereby an additional fee would not be levied on late filing of any document, return, statement, etc. required to be filed with the Ministry of Corporate Affairs (“MCA”) registry. This will reduce the compliance burden on companies/ Limited Liability Partnerships (“LLPs”) and also help in reduction of financial cost involved in adherence to these compliance for the prescribed time period.
  • The requirement for holding a board meeting within the prescribed time period (i.e. 120 days) as per section of 173 of the CA, 2013 has been relaxed by 60 days, which would be applicable for the next two quarters i.e. till September 30, 2020. Therefore, the gap between two consecutive meetings of the board may extend to 180 days for the next two quarters.
  • The Companies Auditors’ Report Order, 2020 would be applicable from Financial Year (“FY”) 2020-2021. A notification bearing F. No. 17la5l2015-CL-V Part I dated March 25, 2020 (“Notification”) has been issued by the MCA in this regard.[1]
  • No violation of law shall be considered if the independent directors are unable to hold even a single meeting as per Schedule lV of the CA, 2013, for the FY 2019-2020.
  • The time period for filing a declaration within 6 months of incorporation of a company regarding commencement of business in Form 20A, has been extended by additional 6 months. This will reduce the compliance burden on newly incorporated companies as the commencement of business may pose certain challenges in these testing times.
  • No violation of law shall be considered if a director is unable to comply with minimum residency requirement of 182 days as per section 149 of CA, 2013. This would be relevant considering the travel restrictions imposed by the countries across the globe as well as lockdown in India.
  • The requirement of creation of reserve for 20 percent of all the deposits maturing in the next FY before April 30, 2020 has been deferred till June 30, 2020.
  • The requirement of investing 15 percent of the amount of maturing debentures during a year by April 30, 2020 as per section 173 of CA, 2013 read with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, has been deferred up to June 30, 2020.

Please note that MCA has issued a circular bearing No. 11/2020 dated March 25, 2020 (“Circular”) with respect to the above.[2] These relaxations would help easing compliance burden upon the companies/ LLPs.

Insolvency and Bankruptcy Code, 2016 (“IBC”)

Following critical measures have been introduced under the IBC:

  • The minimum threshold for filing a petition under IBC has been increased from INR 1 Lakh to INR 1 Crore with immediate effect. This will provide immediate relief to Micro, Small and Medium Enterprises, which will bear direct and adverse effect of COVID-19 on a large scale. It is important to note here that the notification bearing F. No. 30/9/2020-Insolvency dated March 24, 2020 (“IBC Notification”) issued by the MCA does not prescribe any time limit for increase in the threshold.[3] Therefore, it appears that the increase in threshold has not been notified for a certain time period.
  • In the event the situation in relation to COVID-19 persists beyond April 30, 2020, the operation of Sections 7, 9 and 10 under IBC may be considered for a 6 month suspension. Section 7 of the IBC relates to initiation of corporate insolvency resolution by a financial creditor, while Section 9 and 10 talk about initiation of corporate insolvency resolution by operational creditor and corporate applicant.   As a result, initiation of insolvency resolution proceedings against defaulting corporates will be suspended for a limited time period once the measure is introduced. This will provide some relief to the small and medium-sized businesses which may be pushed to the brink of bankruptcy due to this black swan event.
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Income Tax Act, 1961

The following measures have been announced in relation to the Income Tax Act, 1961 (“IT Act 1961”):

  • In relation to FY 2018-19, the last date for filing of belated income tax returns has been extended to June 30, 2020 from March 31, 2020.
  • In relation to delayed payments of advanced tax, self-assessment tax, regular tax, TDS, TCS, equalization levy, STT, CTT made between March 20, 2020 and June 30, 2020, an interest at a reduced rate of 9 percent (as opposed to 12 percent or 18 percent per annum) would be charged. Hence, on a monthly basis, a rate of 0.75 percent would be charged (instead of 1 percent or 1.5 percent). Further, there would be no late fees or penalty chargeable on delay in relation to this period. This is a welcome step as it would ease up the financial burden on the assessee.
  • The last date for Aadhaar-PAN linking has been extended to June 30, 2020.
  • Certain waivers have been offered in relation to payments under the Direct Tax Vivaad Se Vishwas Act, 2020. This legislation was introduced with an objective of resolving direct tax disputes. Under this Act, tax payers availing this scheme and making payment of amount of tax under dispute on or after April 1, 2020 were required to pay additional 10 percent of the determined tax amount. However, payments made by March 31, 2020 did not attract such charge. Vide the measures announced by, no additional payment of 10 percent would be required for payments made till June 30, 2020. This would enable the relevant assessee to take benefit of this legal amnesty scheme without incurring any additional cost.
  • The due dates in relation to the following, which are due for expiration between the period of March 20, 2020 and June 29, 2020 shall be extended till June 30, 2020:
    • issuance of notice, intimation, notification;
    • passing of approval order and sanction order;
    • filing of appeal;
    • furnishing of return, statements, applications, reports and any other documents;
    • time limit for completion of proceedings by the authority; and
    • any compliance by the taxpayer including investment in saving instruments or investments for roll over benefit of capital gains under various laws including IT Act 1961, Prohibition of Benami Property Transaction Act, 1988, The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, STT law, CTT Law, Equalization Levy law, Direct Tax Vivad se Vishwas Act, 2020.

It may be noted that necessary circulars and legislative amendments in this regard would be issued by the relevant Ministry / Department in the due course.

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Goods and Service Tax 

The following measures have been announced in relation to Central Goods and Service Tax Act, 2017 and the Indirect Taxes:

  • The due date for filing of Form GSTR-3B which is due in March, April and May, 2020, for companies having aggregate annual turnover less than INR 5 Crores, has been extended to the last week of June, 2020. Further, no interest, late fee, and penalty shall be chargeable in this regard. This is carried out to ease the compliance burden on the small and medium scale enterprises.
  • In relation to companies having aggregate annual turnover of more than INR 5 Crores, for filing of Form GSRT-3B which is due in March, April and May, 2020, the same has been extended till last week of June, 2020. However, if the return is filed after fifteen (15) days from the due date, a rate of interest at 9 percent per annum (instead of 18 percent per annum) would be chargeable. In this regard, no late fee and penalty would be charged if compliance is done prior to June 30, 2020.
  • The date for opting for composition scheme has been extended till June, 2020. Additionally, the last date for making payments for the quarter ending March, 2020 and for filing returns for FY 2019-20 by composition dealers would be extended till the last week of June, 2020.
  • The date for filing of GST annual returns of FY 2018-19, has been extended to the last week of June, 2020 from March 31, 2020.
  • The due dates in relation to the following compliances under the GST regime, wherein the time limit is due for expiration between March 20, 2020 to June 29, 2020 has been extended to June 30, 2020:
    • issuance of notice, notification;
    • approval order, sanction order;
    • filing of appeal;
    • furnishing of return, statements, applications, reports and any other documents;
    • time limit for any compliance under the GST laws.

It may be noted that the necessary legal circulars and legislative amendments in this regard shall follow with the approval of GST Council.

  • Payment date under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 shall be extended to June 30, 2020 and no interest for this period shall be charged if the payments are made by June 30, 2020.

Customs

The following decisions have been taken with respect to compliances under Customs Act, 1962 (“Act of 1962”):

  • Customs clearance has been categorized as an essential service, which shall be available 24×7 till June 30, 2020.
  • The time limit for issuance of notice, notification, approval order, sanction order, filing of appeal, furnishing applications, reports, any other documents, etc., time limit for any compliance under the Act of 1962 and other allied laws where the time limit is expiring between March 20, 2020 to June 29, 2020, has been extended till June 30, 2020.
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Financial Services

The following measures have been introduced in relation to financial services:

  • A waiver on additional charges for cash withdrawals via debit-cards of a particular bank from an ATM of other banks would be granted for 3-months. This would entail charge free cash withdrawal, as it would be difficult to access an ATM with which an individual holds a bank account, during the lockdown period.
  • The requirement for minimum balance fee for bank accounts would be waived for a period of 3-months.
  • The bank charges would be reduced for digital trade transactions for all trade finance consumers. This step has been taken to ensure that people prefer digital transactions over traditional modes due to easy access.

Department of Commerce

In relation to the commerce sector, the GoI has announced that there would be an extension of timelines in relation to compliances and procedures. The detailed notification in this regard would be released by the Ministry of Commerce.

Conclusion

The COVID-19 pandemic and resultant preventive measures have affected the business sector and given rise to various complications. With a view to reduce the reeling effects of this pandemic, the GoI through the Ministry of Finance has introduced a slew of measures to relax the statutory and regulatory compliances for businesses. These relaxations have been introduced for ease of day-to-day functioning and compliances. Further, these measures would also sustain in management of the financial and operational burdens vis-à-vis statutory and regulatory related compliances. Small and medium scale businesses have been affected the most due to the outbreak of COVID-19, and these measures would go a long way in easing their financial burdens. From an individual perspective, certain relaxations have been introduced in the financial services sector to reduce bank charged for digital transactions. In addition to the above, the due date of ongoing proceedings (regulatory, quasi-judicial and judicial) under the tax regime (direct and indirect) has been extended. This is a much-needed relief for the hour, as given the circumstances, the courts and tribunals across the nation are not functioning or hearing selective matters, and hence taking a legal recourse in this regard would pose a challenge. The formal circular / notification in this regard from the relevant Ministry / Department is expected soon.

[1] The Notification could be accessed here.

[2] The Circular could be accessed here.

[3] The IBC Notification could be accessed here.

From Yatin’s Desk: Delhi High Court favorably rules on alternate Writ remedy against DRP directions

The Delhi High Court (HC), in a recent ruling in the case of P.D.R SOLUTIONS FZC has allowed the Writ petition filed by the petitioner and set aside the order of the Dispute Resolution Panel (DRP) holding that the DRP erred in not taking into consideration all the material and contentions furnished by the petitioner before the DRP. The matter was remanded back to the DRP for considering the objections raised by the petitioner in detail and for passing a fresh order on merits by giving reasons and findings. To put in perspective, the petitioner was a UAE tax resident company engaged in the business of selling domain names, providing web hosting services & server space to clients. The petitioner had claimed a non-taxable position under India-UAE DTAA , which was one of the objection raised before the DRP. The DRP however, without examining the objection, passed an adverse direction following the decision of the Income Tax Appellate Tribunal (ITAT) in case of GoDaddy.com, taxability in which case was determined only under the domestic tax laws.

As a norm, Writ remedies are generally not entertained when there is alternate appellate remedy available to the taxpayer. However, in this case the HC observed that since no assessment order had yet been passed by the Assessing officer (AO), the alternate remedy was not available as yet. Further, the DRP did not adjudicate petitioner’s categorical objections on the taxability under the India-UAE DTAA which violated the principles of natural justice, there was a fundamental error relating to the exercise of jurisdiction and the approach of the DRP rendered the entire process of the dispute resolution as per the scheme of law farcical.

In the ordinary course, a taxpayer would be required to go through the tedious process of litigation – filing appeal before the next level appellate forum (ITAT) against the final order once issued by the AO (based on DRP direction). In a matter like this where the DRP has not examined the technical merits of the case, generally the ITAT would remand the matter back to  AO/DRP for consideration on merits. Procedurally, this may take substantial time, perhaps years, before appeal is considered by the ITAT. Given the favourable consideration by HC at the draft order stage (where only DRP direction has been passed), there may now be another opportunity for tax payer to perhaps explore the Writ option and expedite their litigation where there is a blatant non considerations of the objection raised before the DRP. Having said that, one needs to take note (as observed by the HC) that not every order, where there is a non-application of mind, would become open to challenge under Writ jurisdiction, but only fundamental error which are glaring and noticeable.

The HC has made a fine balance in all fairness and brings forth an alternate remedy where the taxpayer is aggrieved against DRP direction, albeit which may be considered judiciously in exceptional circumstances.

From Yatin’s Desk: Government clarifies on proposed residency rule for Indian Citizens

The Finance Bill (FB) 2020 has proposed a significant change by regarding an Indian citizen (who otherwise is not resident in India under the basis stay rule of 182/120 days or more) as ‘deemed resident’ if the individual is ‘not liable to tax in any other country’ by reason of his domicile or residence or other criteria of similar nature. Memorandum to the FB 2020 explains the intent by stating that the change is proposed to address the practice by individuals to arrange affairs in a fashion such that he is not liable to tax in any country or jurisdiction during a year. Such arrangements are typically employed by high net worth individuals to avoid paying taxes to any country/ jurisdiction on income they earn. The change, at first sight, is bound to give jitters to certain category of citizens who are genuinely employed in tax free countries, for instance UAE which does not have personal income tax.

It will be interesting to take note of the text proposing the change which states as follows – “an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

The use of the expression “by reason of his domicile or residence” is intriguing given the effect could have perhaps been achieved simply by specifying that ‘a citizen of India shall be deemed to be resident in India if he is not liable to tax in any other country’. One wonders whether the use of expression “by reason of his domicile or residence” gives some scope for argument that the deeming residency rule may not apply to citizens where non-taxability is on account of general exclusion of ‘Individual’ from taxation and not on account of lack of meeting threshold of domicile/residence? The debate may have just begun and will certainly open another area of protracted litigation.

While the analysis continues, one way to wriggle out of this conundrum is to take shelter of ties breaker rule under tax treaties, which is again a complex exercise involving interpretations. It will further be pertinent to take note that individuals qualifying as “resident but not ordinarily resident” (RNOR) are not taxable in relation to income which accrues or arises outside India unless it is derived from a business controlled or a profession setup in India. As further proposed in FB 2020, a person will qualify as “RNOR” in India in any previous year, if he has been a non-resident in India in 7 out of 10 previous years preceding that year. Thus, even if an individual is regarded as a “deemed resident” under the new framework from FY 2020-2021, he may still qualify as “RNOR“ thereby safeguarding income accruing outside India from India taxation during the years “RNOR” status is maintained. The 7/10 rule for RNOR status while provides some comfort to citizens who have been settled overseas for over 7 years, this will have far reaching implications for recent emigrants.

The government is ceased of the issue and to its credit has issued a press release clarifying that in case of an Indian citizen who becomes ‘deemed resident’ of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Further clarification is expected to be incorporated in the relevant provision of law. Hope the government also ensures there is no associated filing/reporting burden cast on the overseas citizens.

Whether it is at all worthwhile to change the status quo only for targeting a few HNI’s misusing the law..perhaps not!

From Yatin’s Desk: Income Tax Settlement Scheme – An opportunity to close tax litigation

Update: 22.02.2020 – The tax settlement scheme which was initially proposed to cover litigation pending before Commissioner (appeals), Tax Tribunal, High Court, Supreme Court and international arbitration as on 31 January 2020 is expected to also cover matters under review by Dispute Resolution Panel (DRP), Revision applications before Commissioner and orders for which timeline for filing appeal has not expired as on 31 January 2020. The Government is going all guns blazing to make this scheme a success. A great opportunity for litigants.

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The Finance Minister, in her budget speech introducing the Finance Bill 2020 had announced bringing a direct tax settlement scheme with the intent of reducing over 4.8 lacs direct tax cases pending before various appellate authorities. In furtherance of the announcement, “The Direct Tax Vivad Se Vishwas Bill, 2020” has been introduced in the Parliament for consideration. The same will become effective from the date to be notified post approval by the parliament and presidential assent.

The scheme provides an opportunity to settle arrears of tax against appeals pending as on 31 January 2020 before the appellate forums [Commissioner (Appeal), Income Tax Appellate Tribunal, High Court and Supreme Court]. Where the arrears relates to disputed tax and interest & penalty on such disputed tax, there is a complete waiver of interest and penalty on payment of disputed tax by 31 March 2020. Payment beyond 31 March 2020 but within the last date (to be notified), will require additional payments of 10% of the disputed tax. Further where the tax arrears relates to disputed interest, penalty or fee, there will be a waiver of 75% of such amount if paid by 31 March 2020 and 70% where payment made beyond 31st March 2020 till the last date to be specified. The scheme further provided for immunity from prosecution.

The scheme requires the taxpayer to file a declaration before the designated Commissioner of Income tax who will within a period of 15 days from the date of receipt grant a certificate containing particular of tax arrears and the amount of tax to be paid. The taxpayer will thereafter be required to pay the tax determined within 15 days from the date of receipt of the certificate and intimate the payment thereof to the authorities. On issue of certificate, pending appeal before the Commissioner (Appeal) and Income tax Appellate Tribunal will be deemed to be withdrawn. With regard to appeals before High Court/Supreme Court or where proceedings for arbitration, conciliation or mediation have been initiated, the taxpayer will be required to withdraw the appeals. Rules and forms in relation to the scheme are yet to be notified.

The scheme leaves some open questions such as eligibility of tax payers who are yet to file appeal as on 31 January 2020 (within the timeline prescribed), impact on appeals deemed to be withdrawn before the appellate authorities upon issue of certificate where the taxpayer is unable to pay the liability with the 15 day timeline, adjustment of past pre-deposits, etc. Hopefully some FAQ’s will clarify on such aspect. Further, given the 15 days payment timeline, this may be a challenge for foreign companies not having operative bank account in India to facilitate money transfer. The Government may consider a mechanism to facilitate this.

Overall the tax settlement scheme is a welcome move by the government to reduce pending litigation. Tax payers should critically review their litigation exposure and avail the opportunity to get closure specifically where exposure of interest (due to long pending disputes), penalty and prosecution is high.

From Yatin’s Desk: MAT credit dilemma under 25% corporate tax rate option

In light of last week’s historical reduction in the corporate tax rates applicable during FY 2019-20, existing domestic companies (not availing tax exemptions/specified deductions) have the option to avail reduced corporate tax rate of ≈25%. Such companies have also been exempted from applicability of Minimum Alternate Tax (MAT). Companies not opting for such scheme will continue to be taxed at the current rate (≈29%/35%) and subject to MAT, albeit at the reduced rate of ≈ 17.5% vis-a-vis 21.5%.

In absence of MAT application to such companies or any change in MAT credit provisions specifically permitting set-off of MAT credit against 25% liability, the debate will continue for the next few days on the entitlement to set of unutilized MAT credit. However, if the view emerges against the set-off, it will be vital for companies to consider their MAT credit position before jumping into the perceptibly lucrative 25% tax regime. As a big picture, so long the companies have sufficient MAT credit, the liability can be restricted to 17.5% (MAT liability) by setting off excess liability computed (at general rate of 29%/35%) against MAT credit entitlement. Accordingly, it may be beneficial for companies to continue with the existing regime till the MAT credit is completely absorbed. There is always the option to exercise the 25% regime in future.

While the taxpayers do their math, it will be worthy if the government clarifies its position.

From Yatin’s Desk: Withholding tax (TDS) default, no more business as usual

Indian tax laws mandate payers to withhold taxes at source on payments to residents (in case of specified payments) and also non-residents (where their income is taxable in India). Non-compliance has penal consequences. While failure to withhold tax has interest and penalty implications (i.e. financial costs), consequences are severe in case of non-deposit or late deposit of tax collected leading to additional prosecution implications (financial+ criminal implications). Given the humongous amount of data collated by the Revenue Authorities and use of data analytic, it is not unusual to find show cause notices being issued to defaulter now days. However what should raise alarm for the defaulters is the fact that where the default relates to non/delayed deposit of taxes leading to prosecution proceedings, the Magistrate Courts are taking a serious view on the matter with defaulters being sentenced to imprisonment.

One recent case before the Ballard Pier Magistrate Court (Mumbai), related to a delayed payments of approx. INR 850K, which was paid with interest and also penalty. The Magistrate Court disregarded the plea of financial constraint and proceeded to convict the defaulter sentencing to 3 months imprisonment. Though, the decision is appealable before higher Appellate Courts, one needs to take note that such proceedings are highly complex, time consuming and financially expensive. Take for instance this specific matter – it related to withholding default in financial year 2009-10, criminal complaint before Magistrate Court was filed in 2004 and after almost 30 odd hearings/adjournments before the Magistrate Court, the proceedings concluded in April 2019; a 10 year saga, which will further continue for years before higher Courts.

It is also relevant to take note that where the defaulter is a Company, the direct impact is on the directors, who generally are proceeded against leaving it for them to defend their innocence. A clear message – by no means delay or fail to deposit taxes deducted if you want to be on the right side of law, else don’t complain of government action!!

From Yatin’s Desk: Changes proposed to the rules for attribution of income to Permanent Establishment

Attribution of profits to a Permanent Establishment (PE) of a Multinational Enterprises (MNE) in India has been a commonly ligated matter and marred with uncertainty. The Indian tax administration has placed for public comments report of the Committee constituted to examine the existing scheme of profit attribution to PE, with the intent of framing guidelines for profit attribution, bringing certainty and transparency. While the debate on the proposals will surely continue for long, the document is a valuable read for India’s position which highlight India reservation to the authorized OECD approach for PE income attribution.

The Committee in its report emphasizes the fact that the Indian tax treaties are predominantly based on UN Model Convection which under Article 7 legitimizes attribution of profits to a PE on the basis of apportionment of the total profits of the enterprise to its various parts. Such methods is adoptable where profits cannot be determined through a direct method i.e. based on verifiable books of accounts prepared as per acceptable accounting standards. In contrast, Article 7 of OECD model convention post 2010 advocates the approach of allocation taking into account the functions performed, assets used and risks assumed (FAR analysis) by the enterprise through the permanent establishment and through the other parts of the enterprise.

The Committee has observed that business profits are contributed by both demand and supply of the goods. Article 7 of the OECD Model Tax Convention and approach recommended by OECD (based on FAR) is purely supply side approach towards profit attribution and disregards the role of demand in contributing to profits attributable to PE. Further, the Indian tax treaties have not included the concept of Income attribution based on FAR as advocated by OECD model convention, thereby permitting attribution of profits in a manner different from the authorized OECD approach i.e. by resorting to the direct accounting method and where that may not be possible, by apportionment of profits.

Accordingly, the Committee has suggested PE profit attribution based on a combination of (i) profits derived from Indian operations and (ii) three factor method based on equal weight accorded to sales (representing demand), manpower and assets (representing supply including marketing activities). In other words, profits of the multinational enterprise will first be apportioned for India sales (amount arrived at by multiplying the revenue derived from India x Global operational profit margin). As a second step, such profits will be attributed proportionately to (a) sales within and outside India; (b) employees and wages within and outside India; and (c) assets deployed within and outside India for Indian operations, each with 33% weightage. Further to address a situation whether the multinational enterprise suffers losses or has profit margin less than 2%, a margin of 2% of revenue derived from India sale is proposed to be regarded as deemed profit for India operation, thereby recommending minimum base level taxation. With regard to digital economy, where nexus to taxation is attributed to the concept of significant economic presence, considering the role of users, a fourth factor (i.e. user intensity) needs to be further built into the income attribution formulae.

The OECD approach for income attribution based on FAR analysis, which the Committee regards as factoring only supply side attributes (and not demand) finds favour with the Committee where no sales takes place in India. For instance, where a multinational enterprise constitutes a PE in India and compensates the PE at arm’s length basis FAR analysis and further such enterprise does not have any sales in India, no further income will be attributable to India (in absence of any play of demand side factor). However, where sales are made in India, the reading of the Committee report suggests formulae based attribution would become the rule and additional income attributable would become taxable in India (post allowance of income apportioned to supply factors and offered to tax in India).

Given the development, there will be a significant transformation to the concept and impact on income attribution to permanent establishments in India, should the proposed recommendation be formulated into mandatory rules. The demand side factors which the Committee consider as an important consideration would seemingly lead to attribution of 33 percent of the profits derived from sale in India even if no further attribution is required to be made in absence of other factors. It will be interesting to see how the courts view the principles around income attribution in light of the divergence in OECD approach and Indian tax administration position.

From Yatin’s Desk: Non tax filing prosecution risk

The Indian tax administration is taking strict action for non compliance under the India tax laws. The authorities have been launching penalty & prosecution proceedings for failure to file a tax return within the due date. While the tax provisions provide for an extended period for filing a belated return (till the end of the assessment year), the tax authorities have been identifying non filers and late filers and initiating penalty & prosecution proceedings, even if filed within the prescribed belated period.

Where prosecution proceedings are launched, the taxpayers may unfortunately have to go through the rigour of long drawn criminal proceedings before the Criminal Court to establish that the failure was not willful and absence of culpable mental state. Tax payers impacted by such action typically attempt as a first recourse quashing of prosecution proceedings through petition before the High Court. This unfortunately is unlikely to have much success considering the courts in such matters do not dwell into fact finding to establish bonafide of the taxpayer, (a domain of the criminal court) established through evaluation of facts and examination of witnesses.

Where penalty proceedings are simultaneously launched, which would ordinarily be the case, a favourable outcome before the Appellate Tribunal, on merits, would have a direct bearing on the prosecution proceedings before the trial court. The Appellate Tribunal being a final fact finding authority, if on appreciation of facts does decided that the tax payer had bonafide reasons for not being able to comply with the filing obligation, such determination would be a significant finding for discharge from criminal proceedings or alternatively quashing of prosecution proceedings through application to the High Court. A tax payer will be better off establishing the facts and circumstance before the Tax Tribunal than the Criminal Court. Proceedings before Criminal Court can rather be intimidating for an ordinary tax payer who may just be overwhelmed by the sheer thought of seeking a bail, examination and cross-examination of witness, the longevity of proceedings, etc.

Given the serious implications of prosecution proceedings, it will be extremely important for the impacted tax payers to have a well thought through strategy to address the challenges of such proceedings.

Run Up to the Budget 2018-19

Economic Survey of India 2017-18:

Policy Reforms in Zeitgeist of Stigmatized Capitalism

Economic Surveys have sometimes been seen as portends of the Budget that follows. It is often used to engage in a sort of crystal ball gazing and guess work to predict the Budget proposals. However, a more useful manner of looking at these is that the Economic Surveys provide a much needed context to the Budget.

Economic Survey 2018-191 in much the same manner is not only a report card of the Government for the year past, but also provides a context in which the Budget proposals would arrive. In the following paragraphs, we have attempted to flesh out those areas that we perceive may see an amount of thrust in the Budget proposals. Not just that, we believe that the following paragraphs will supply you, the reader, with a certain amount of clarity vis-a-vis the "Why" of the Budget proposal, providing, as it were, the context within which the Finance Minister would stand to deliver his speech. Between these lines, there could be technical monsters that present themselves - for instance, certain tax proposals may be a necessary concomitant of what the Government may seek to achieve via the Budget in the context of the economic scorecard of the country. These have, in some places, been sought to be presented as separate highlights within this page.

Our reading of the Survey indicates that while at an overall level, there are no immediate causes for alarm, nonetheless, the Government has a tight rope walk ahead of it, in balancing the need for economic growth with the deficit levels. This nuance appears in paragraph 1.29, and therefore, in the very first chapter, where the Economic Survey notes:

"It is that zeitgeist (or Maahaul) of stigmatized capitalism—an accumulated legacy inherited by the government—that made policy reforms so difficult and makes the recent progress in addressing the Twin Balance Sheet challenge noteworthy."

In any event, based on High frequency indicators2 in its outlook for 2017-18, the Economic Survey suggests that a robust recovery is taking hold. However, the level of indicators remain below potential.

The CSO3 has forecast the real GDP4 at 6.5 percent. However, the Economic Survey pegs this the expectation of GDP growth in 2017-18 at 6.75 percent. The Current Account Deficit remains well below the 3 percent of GDP threshold beyond which vulnerability emerges, and foreign exchange reserves are at US$432 billion (spot and forward) at end December 2017 (well above prudent norms, as the Survey notes).

On GST

GST revenue collections are robust. The Survey predicts the GST revenue growth as compared to the Annual revenues of indirect taxes in 2016-17 at 12 percent.

GST Revenue Collection (in lakh crores)

Particulars of collection
agency and tax
2016-17
(Annual)
Nature of Tax
(in GST
regime)
2017-18
(Estimated Annual
Steady State
revenues)
States4.4SGST2.5
Center5.3CGST2.5
Excise1.4IGST4.9
Service2.5Cesses0.9
CVD / SAD1.4Not applicable
Total10.9
Estimated Growth of GST 12%

With the rate of growth in GST being 12 percent (on an estimate basis), and the nominal GDP growth of 10.5 percent projected in the Survey, the buoyancy of GST amounts to 1.14. This is a major change from the historic buoyancy of indirect tax that has been at around 0.9 percent.

GST as an information mining tool

"The GST has been widely heralded for many things, especially its potential to create one Indian market, expand the tax base, and foster cooperative federalism. Yet almost unnoticed is its one enormous benefit: it will create a vast repository of information, which will enlarge and surely alter our understanding of India’s economy."5 With this statement the Survey establishes GST as a game changer in the information that it acts as a tool to gather. Some exciting new findings arising out of GST data mining are highlighted here:

  • the assumption that the B2C firms (i.e. the smaller firms) would opt for composition has been proved wrong as such firms nonetheless purchase from large enterprises
  • distribution of GST base among the states appears closely related to their Gross State Domestic Product allaying fears that the shift to GST would undermine major producing states' tax collections
  • there is a strong correlation between export performance and states' standard of living
  • Internal trade of India is a whopping 60 percent of the GDP, which beats the estimates by 10 percent
  • India's formal non-farm payroll is substantially greater than believed - social security measures hint at 31 percent of the non-agricultural work force as formal sector payroll, but GST data suggests formal sector payroll of 53 percent

Other Determinants of Growth

Personal income tax collections have been pegged at 2.3 percent for the FY 2017-18 at the back of measures such as demonetization and GST.  The other two significant aspects that have been highlighted by the Survey are:

  • Exports (hailed, as it were, as the biggest source of upside potential) and
  • Implementation of the Insolvency and Bankruptcy process

Based on the above, inter alia, the Survey pegs the growth rate between 7 and 7.5 percent.6

Timely Justice - A Measure of Ease of Doing Business

It has been widely acknowledged, and stated extremely succinctly by Amrit Amirapu that "Justice Delayed is Development Denied".7  Especially taken note of are tax cases - with the average pendency of 6 years per case, the situation has been rather politely deemed to be acute! Per illustrative data quoted by the Survey, the value of government projects in six infrastructure ministries that are currently stayed by court injunctions, as well as the average duration of their stays has been tabulated as given below:

Stayed Projects - Stock (6 ministries as on October 31, 2017)

MinistryStayed ProjectsTotal Value
(Rs. Crores)
Duration of Stay
(Years)
Shipping22,6205.9
Power1123,9133
Road3011,2163
Petroleum23420.9
Mines121063
Railways1213,8823
Total 5252,0814.3

The total legal expenditure of the Corporate India between 2015-16 was close to 20 thousand crores. Other damning statistics relate to tax cases where the Survey notes that the success rate of the Department at all three levels of appeal - Appellate Tribunals, High Courts, and Supreme Court - and for both direct and indirect tax litigation is under 30 percent. "The Department unambiguously loses 65 percent of its cases. Over a period of time, the success rate of the Department has only been declining, while that of the assessee has been increasing".

From a Policy perspective, the Survey suggests the following measures:

  • Expanding judicial capacity in the lower courts and reducing existing burden on the higher courts via additional capacity to deal with economic and commercial cases at the lower levels, reducing the original side jurisdiction from the High Courts and lesser exercise of discretionary jurisdiction by the higher courts
  • Tax department should limit its appeal - recognizing the bureaucratic risk aversion, the survey suggests the constitution of an independent panel to decide on further appeals
  • Increasing state expenditure on judiciary
  • Creation of more subject matter and stage specific benches
  • Reduction of reliance on injunctions and stays and stricter timelines for decision on these
  • Better court case management and court automation on the lines of Crown Court Management Services of the UK

Deep Dive - Selected Highlights of the Survey

Fiscal Developments during the year

The Survey notes that there are 3 distinct patterns on revenue front till November 2017.

  • the gross tax collections are reasonably on track
  • non tax revenues have visibly underperformed
  • non-debt capital receipts, mainly proceedings from disinvestments are doing well

%age Growth in Items of Receipt (April to November)

 2014-152015-162016-172017-18
Gross tax revenue6.520.821.516.5
Net tax revenue4.312.533.612.6
Non tax revenue20.534.91.0-29.7
Total revenue receipts7.817.824.81.1
Non-debt capital receipts-17.3180.357.189.9
Non-debt receipts7.32025.84.6

In contrast to revenue, the expenditure had been robust - which in the present context of the data, appeared to be a euphemism for "tearaway". In any event, the rationale provided by the Survey appears to be sound inasmuch as that:

  • due to advancing of the budget cycle the spending agencies planned in advance and could implement their expenditure plans effectively, and before time, as it were and
  • front loading of certain expenditure as a pat of prudent expenditure management

In any event, this had led to a certain amount of pressure on the revenue and fiscal deficit on a year on year basis - note the inordinately high percentages for 2017-18 in the table below.

Deficit Indicators (%age of BE)

 2015-162016-172017-18
Revenue Deficit87.598.6152.2
Fiscal Deficit8785.8112

Renegotiation of PPAs8 by certain states

One of the key objectives of the Electricity Act, 2003 is promotion of competition in the electricity sector. Section 63 of the Act specifies that (notwithstanding anything contained in section 62), the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government. A tariff order shall, unless amended or revoked, continue to be in force for such period as may be specified in the tariff order. The revised tariff policy was published in January, 2016.

With the recent rounds of auctions, very low tariffs came to be discovered. Auction for wind based power held by SECI 9 held in February 2017 realised a tariff of INR 3.46/unit. The lowest feed in tariff for wind on the other hand is at INR 4.16/unit. Second wind auction led to a tariff of INR 2.64/unit - which while welcome in some ways, led to renegotiations of PPAs already signed from certain discoms. Per CRISIL, such renegotiations have the potential of risk to investment worth INR 48000 crores. The Survey takes note of this risk and suggests that "affordable financing holds the key for financing sustainable energy projects". The Survey notes that risk mitigating instruments such as payment guarantee fund or a foreign exchange fund available to developers could be a way forward. Renewable energy has already been placed under the priority sector lending and the bank loan for solar roof-top systems is to be treated as a part of home loan/home improvement loan with subsequent tax benefits. Currently, the levelized tariff is approaching grid parity. The Survey advocates a case for revisiting the subsidies and incentives being given to the renewable energy sector.

Logistics - Challenges and Suggested Plan

With GST, the next big step has to be logistics, given the avowed objective of a single market economy. However, there is much to be desired in this sector. Amongst the challenges are multiple policy making bodies, unfavourable modal mix, and general apathy towards logistics, that plagues the industry. If the benefits of GST are to be harnessed, logistics would have to play a key part therein. The Survey suggests certain key action plans

  • Formulation of National Integrated Logistics Policy to bring in greater transparency and enhance efficiency in logistics operations
  • Develop integrated IT Platform as a single window for all logistics related matters and act as a Logistics marketplace
  • Usher in ease of documentation, faster clearance, digitization.
  • Bring down logistics cost to less than 10% of GDP by 2022
  • Faster clearances for setting up of logistics infrastructure like Multi-modal logistic parks (MMLPs), Container Freight Station (CFS), Air Freight Station (AFS) & Inland Container Depot (ICD).
  • Introduce professional standards and certification for service providers
  • Promote introduction of high-end technologies like high-tech scanning equipment, RFID, GPS, EDI, online Track & Trace systems in the entire logistics network.
  • Improve Logistics skilling in the country and increase jobs in Logistics sector to 40 million by 2022

Hybrid Annuity Model in Infrastructure Development

While addressing Industry and Infrastructure sector, the Survey takes a special note of the Hybrid Annuity Model. This model, mooted for road construction, is a combination of EPC (Engineering, Procurement and Construction) model and BOT - Annuity (Build, Operate, Transfer) model. Under the EPC model, the private players construct the road and have no role in the road’s ownership, toll collection or maintenance. National Highways Authority of India (NHAI) pays private players for the construction of the road. The Government with full ownership of the road, takes care of toll collection and maintenance of the road.

Under the BOT model

  • private players have an active role in road construction, operation and maintenance of the road for a specified number of years as per agreement. After the completion of the years of operation, the private players transfer the asset back to the Government.
  • the private players arrange all the finances for the project, while collecting toll revenue (BOT toll model) or annuity fee (BOT annuity model) from the Government, as agreed.

In the BOT annuity model, the toll revenue risk is taken by the Government. The Government pays private player a pre-fixed annuity for construction and maintenance of roads.

Hybrid Annuity Model combines EPC (40 per cent) and BOT-Annuity (60 per cent) Models. On behalf of the Government, NHAI releases 40 per cent of the total project cost, in five tranches linked to milestones. The balance 60 per cent is arranged by the developer. The developer usually invests not more than 20-25 per cent of the project cost, while the remaining is raised as debt.

In BOT toll model, the private players did not show their willingness to invest, since they had to fully arrange for the entire finances, either through equity contribution or debt. NPA-riddled banks were reluctant to lend to these projects. Since there was no compensation structure such as annuity, the developers had to take entire risk in low traffic projects. The essence of Hybrid Annuity Model arose due to requirement of better financial mechanism where the risk would be spread between developers and the Government.

Issue of vacant housing

The Survey takes a special note of the issue of vacant housing. Of the total residential stock. the Survey finds that 12.38 percent are vacant. The Survey states that "India’s housing requirements are complex but till now policies have been mostly focused on building more homes and on home ownership. The above data suggests that we need to take a more holistic approach that takes into account rentals and vacancy rates. In turn, this needs policy-makers to pay more attention to contract enforcement, property rights and spatial distribution of housing supply vs. demand." However, with a strong stress on this issue, the possibility of tax proposals impacting vacant housing could be expected.

In Conclusion

Amongst the various issues discussed in the Economic Survey, the aspects analysed by us are essentially areas of concern that may potentially impact both policy making and law in relation to taxation as well as other sectors.  One of the factors stressed upon in the Economic Survey is effective enforcement of contracts, through a more effective judicial process; this will significantly contribute to the ‘ease of doing business’. 

From this analysis of the Economic survey, the key policy measures in the near to medium term could be in the road, logistics, judicial and energy sectors. 

We believe it relevant to mention that this is the first in the many exercises to be undertaken by us with respect to the analysis of the upcoming Budget. We would be happy to have you, our readers, researching and reflecting on our analysis to engage with us about your thoughts and perceptions to encourage fluid dialogue.

With special thanks to Siddharth Sharma and Shivangi Nanda. 

Team Aureus

#IndiaBudget2018Aureus

Footnotes


Amendments in FDI Policy – January, 2018

Viineet V. Srivastav & Astha Srivastava

The following amendments have been introduced by Department of Industrial Policy and Promotion (DIPP) in the Foreign Direct Investment (FDI) regime on January 10, 2018:

100% FDI in single brand retail

The prevailing FDI policy allowed 49% FDI through the automatic route and beyond 49% and upto 100% through the Government approval route in single brand retail trade (SBRT) sector, the said limit has been increased to 100% through automatic route.

Single brand retailing entities would be allowed to begin incremental sourcing of goods from India for global operations during the first 5 years from the first day of the opening of the first store against the mandatory sourcing requirement of 30 percent purchases from India. After completion of the said 5 year period, the entities would be required to meet the mandatory sourcing requirement of 30 percent purchases from India.

A non-resident trading entity or entities, whether owner of the brand or otherwise, would be permitted to undertake SBRT in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking SBRT and the brand owner.

Civil Aviation

Foreign airlines have been permitted to invest upto 49% in Air India under approval route, subject to the following conditions:

FDI in Air India including that of foreign airline(s) shall not exceed 49% either directly or indirectly

Substantial ownership and control of Air India would continue to vest in Indian Nationals.

Construction Development

It has been clarified that since real-estate broking service does not amount to real estate business, therefore the same would be eligible for 100% FDI through automatic route.

Power Exchanges

 While the existing FDI policy provided for 49% FDI through automatic route in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, however, Foreign Portfolio Investors (FPI) / Foreign Institutional Investors (FII) purchases were restricted to the secondary market only. Accordingly, the Government has allowed FPIs/FIIs to invest in Power Exchanges in the primary market as well.

Other Approval Requirements under FDI Policy

Issue of shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. would be permitted under automatic route in case of sectors under automatic route.

FDI in an Indian company engaged only in the activity of investing in other Indian companies or LLPs and in Core Investing Companies would be aligned with the FDI provisions in the “Other Financial Services” category. Accordingly, if the said investor companies in India are regulated by any financial sector regulator, then foreign investment upto 100% under automatic route would be allowed and if they are not regulated by any Financial Sector Regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100% would be allowed under approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.

Competent Authority for examining FDI proposals from countries of concern

The competent authority for dealing with FDI proposals will be the Department of Industrial Policy and Promotion (DIPP) for investments in automatic route sectors requiring approval only on the matter of investment being from Countries of Concern. The competent authority would be concerned Administartine Department/ Ministry in the case of investments made in sectors requiring government approval and also requiring security clearance with respect to Countries of Concern.

 Pharmaceuticals

With respect to the Pharmaceuticals industry, it has been decided to change the definition of medical devices under the existing policy. Further, the existing policy provided that medical devices with respect to FDI policy would be defined with reference to the Drugs and Cosmetics Act and since the definition in the FDI policy is complete in itself, it has been decided to do away with this reference to the Drugs and Cosmetics Act.

Prohibition of restrictive conditions regarding audit firms:

In cases where the foreign investor specifies a particular auditor/ auditing firm having international network for the Indian investee company, then audit of such company would take place in the form of a joint audit in which one of the auditors should not be from the same network.