GST – Aureus Law Partners

Guidelines on Provisional Attachment of Property under GST

Central Board of Indirect Taxes and Customs (“CBIC”) has issued Circular No. CBEC-20/16/05/2021-GST/359 dated February 23, 2021 providing guidelines for provisional attachment of property under Section 83 of the Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”).

Section 83 provides for provisional attachment of property for the purpose of protecting the interest of revenue during the pendency of any proceeding under Section 62 (Assessment of non-filers of returns) or Section 63 (Assessment of unregistered persons) or Section 64 (Summary assessment) or Section 67 (Power of inspection, search and seizure) or Section 73 (Demand of tax) or Section 74 (Demand of tax by invoking extended period of limitation) of the CGST Act. In relation to the same, Rule 159 of the CGST Rules provides the procedure to be followed by the proper officer.

We have culled out the highlights of the Guidelines herein below.

Grounds for provisional attachment of property

Commissioner must exercise due diligence and duly consider as well as carefully examine all the facts of the case, including the nature of offence, amount of revenue involved, established nature of the business, and extent of investment in capital assets before attaching the property.
Commissioner must have reasons to believe that the taxable person may dispose of or remove the property if not attached provisionally.
Commissioner should duly record the ‘reasons to believe’ on file.
CBIC has directed that the power of provisional attachment must not be exercised in a routine/mechanical manner and should be based on careful examination of all the facts of the case. It has been mandated that the collective evidence, based on the proceedings/ enquiry conducted in the case, must indicate that prima-facie a case has been made out against the taxpayer, before going ahead with any provisional attachment.
As the provisional attachment of property may affect the working capital of the taxable person, the investigation and adjudication should be completed at the earliest.

Cases fit for provisional attachment of property

Provisional attachment should not be invoked in cases of technical nature and should be resorted to mainly in cases where there is an evasion of tax or where the wrongful input tax credit (“ITC”) is availed or utilized or wrongfully passed on. Provisional attachment can be resorted to in following cases:

Where taxable person has supplied any goods or services without issue of any invoice with an intention to evade tax; or
Where taxable person has issued any invoice without supply; or
Where taxable person has availed ITC using the invoice or bill issued without any corresponding supply or fraudulently availed ITC without any invoice; or
Where taxable person has collected any amount as tax but has failed to pay the same to the Government beyond a period of 3 months; or
Where taxable person has fraudulently obtained refund; or
Where taxable person has passed on ITC fraudulently to the recipient(s) but has not paid the commensurate tax.

Aforesaid list is not exhaustive and is illustrative only.

Procedure for provisional attachment of property

Commissioner should duly record the ‘reasons to believe’ on file and pass an order in Form GST DRC -22 with proper Document Identification Number (“DIN”) recording the details of property being attached.
Copy of order in Form GST DRC – 22 to be sent to the concerned revenue authority / transport authority / bank or the relevant authority to place encumbrance on the attached property. The property, thus attached, shall be removed only on the written instructions from the Commissioner.
Copy of such attachment order shall be provided to the taxable person as early as possible so that objections, if any, to the said attachment can be made by the taxable person within 7 days.
If such objection is filed by the taxable person, Commissioner should provide an opportunity of being heard. After considering the facts presented by the person in his written objection as well as during the personal hearing, if any, the Commissioner should form a reasoned view whether the property is still required to be continued to be attached or not, and pass an order in writing.
In case, the Commissioner is satisfied that the property was or is no longer liable for attachment, he may release such property by issuing an order in FORM GST DRC- 23.
Even in cases where objection is not filed within the time prescribed under Rule 159(5) of CGST Rules i.e. 7 days, the Commissioner should pass a reasoned order.
Each such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order of attachment.
In case the attached property is of perishable/hazardous nature, then such property shall be released to the taxable person by issuing order in FORM GST DRC-23, after taxable person pays an amount equivalent to the market price of such property or the amount that is or may become payable by the taxable person, whichever is lower, and submits proof of payment.
In case the taxable person fails to pay the said amount, then the perishable / hazardous property may be disposed of and the amount recovered from such disposal of property shall be adjustable against the tax, interest, penalty, fee or any other amount payable by the taxable person.
Further, the sale proceeds thus obtained must be deposited in the nearest Government Treasury or branch of any nationalised bank in fixed deposit and the receipt thereof must be retained for record, so that the same can be adjusted against the amount determined to be recoverable from the said taxable person.

Types of property that can be attached

Value of property attached should not be excessive and should be reasonable to the estimated amount of pending revenue. More than one property can be attached.
Provisional attachment can be made only of the property belonging to the taxable person, against whom the proceedings under Section 83 of the Act are pending.
Movable property should normally be attached only if the immovable property, available for attachment, is not sufficient to protect the interests of revenue.
As far as possible, it should also be ensured that such attachment does not hamper normal business activities of the taxable person. This would mean that raw materials and inputs required for production or finished goods should not normally be attached by the Department.
In cases where the movable property, including bank account, belonging to a taxable person has been attached, such movable property may be released if taxable person offers any other immovable property which is sufficient to protect the interest of revenue.

(Circular No. CBEC-20/16/05/2021-GST/359 dated February 23, 2021 issued by Central Board of Indirect Taxes and Customs)

By Manish Parmar. Views are personal. Manish can be reached at manish.parmar@aureuslaw.com.

As on: Tuesday Feb 23, 2021

High Court Denies Refund of Credit under Inverted Duty Structure

In a recent judgment of Madras High Court in the case of TVL Transtonnelstroy Afcons Joint Venture v. UOI,[1] the Court denied refund of tax paid on input services on account of inverted tax structure. This marks significant blow to taxpayers who operate under ‘inverted duty structure’, and have been claiming refund on account of paying higher rate of tax on input supply. Earlier in July, the Gujarat High Court in VKC Footsteps India Private Limited v. UOI[2], had read down the explanation (a) to Rule 89(5) of Central Goods & Services Tax Rules, 2017 (“Rules”), and had allowed refund of tax paid on input services as well.

What is “Inverted Tax Structure”?

Inverted Tax Structure is a situation where the supplier pays higher rate of tax on its input supplies, and discharges comparatively lower rate of tax while making its output supply. Consequently, a large pool of credit of tax paid on input supplies is accumulated. This would result in cascading effect of taxes in the form of unabsorbed excess tax on inputs with consequent increase in the cost of product which is against the very tenet of GST being a consumption tax. In order to address the said anomaly, GST law provides for refund of accumulated unutilised input tax credit (“ITC”).

Issue

Section 54 of the Central Goods and Services Tax Act, 2017 (“Act”) provides for refund of GST in certain cases. Sub-section (3) provides for refund of unutilized ITC in cases of zero rated supplies and ITS i.e. where credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. ITC has been defined under Section 2(63) of CGST Act to mean credit of ‘input tax’. Section 2(62) defines ‘input tax’ to mean tax charged on supply of goods and / or services. Accordingly, the taxpayers were eligible to claim refund of unutilised ITC accumulated due the inverted tax structure basis the formula prescribed under Rule 89(5) of CGST Rules. Said rule was amended with retrospective operation from July 1, 2017 by an amendment introduced in 2018 to exclude ‘tax paid on input services’ from the meaning of ‘Net ITC’. In effect, the amended Rule 89(5) by employing the expression “input tax credit availed on inputs’, has the effect of granting refund of tax paid only on ‘inputs’ and denying the same on ‘input services’. Said amendment was challenged in multiple proceedings by contending that amended Rule 89(5) by restricting the refund to ‘inputs’ only, runs contrary to the substantive provision i.e. Section 54(3), and is ultra vires to this extent.

Gujarat High Court’s view in the VKC (supra)

Court observed that Section 54(3) employs the expression ‘any unutilised input tax credit’, and ITC is defined under Section 2(63) to mean credit of input, and ‘input tax’ as defined in Section 2(62) means central tax, state tax, integrated tax or union territory tax charged on any supply of goods and / or services. Hence, Section 54(3) must be read to include tax paid on input services as well. Accordingly, upon conjoint reading of Act and Rules, Court held the explanation (a) to Rule 89(5) ultra vires the provision of Section 54(3), and observed that by prescribing formula under the Rules, the Executive cannot restrict the substantive provision enacted by the Legislature. Accordingly, Revenue was directed to process the refund of unutilised ITC by including the tax paid on ‘input services’ as well.

Madras High Court’s view in TVL (supra)

Madras HC did not subscribe to the view taken by the Gujarat HC in VKC (supra) by observing that the import of proviso to Section 54(3) was not discussed in VKC (supra). It was observed that Section 54(3) undoubtedly enables a registered person to claim refund of any unutilised ITC. However, the principal of the said enacting clause is qualified by the proviso which states that "provided that no refund of unutilised input tax credit shall be allowed in cases other than". It was observed that unless a registered person meets the requirements of clause (i)[3] or (ii)[4] of Sub-section 3, no refund would be allowed. Under clause (ii), the expression used is ‘inputs’, which must mean to include goods[5] only and not input services[6]. Hence, Explanation to Rule 89(5) by prescribing the formula, thereby limiting the ambit of ‘Net ITC’ to mean tax paid on ‘inputs’ only, is valid and vires to Section 54(3).

Court also observed that refund is a statutory right, and the Parliament is within its legislative competence to impose a source-based restriction in order for a supplier to be eligible for refund of unutilized ITC.

Conclusion

Fundamental principle behind the overhauling of erstwhile indirect tax regime by replacing it with much-awaited GST law, was to remove cascading effect of taxes by way of set-off in order to ensure continuous chain of credits from supplier to the last retail point. Law relating to credits has evolved over time as CENVAT was introduced in place of MODVAT to allow of credits of service tax as well. Under the GST regime as well, un-amended Rule 89(5) did not differentiate between the taxes paid on ‘inputs’ and ‘input services’. However, the restriction imposed by retrospective amendment to Rules, seeks to create a source-based parameter for refund entitlement of unutilised ITC.

In view of the dissenting views of Madras HC and Gujarat HC, Supreme Court’s decision on the constitutionality of said amendment remains to be seen. In the meantime, taxpayers may continue to claim refund of unutilised ITC relating to ‘input services’ as time limit for claiming such refund is only two years.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Views are personal.

[1] Madras High Court’s decision dated September 21, 2020

[2] Gujarat High Court’s decision dated July 24, 2020

[3] (i) Zero rated supplies made without payment of tax;

[4] (ii) Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

[5] Section 2(59) of CGST Act defines ‘input’ to mean goods other than capital goods used or intended to be used by supplier in the course or furtherance of business;

[6] Section 2(6) of CGST Act defines ‘input services’ to mean services used or intended to be used by a supplier in course or furtherance of business;

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.

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.

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.

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.

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: Non-resident taxpayers get partial breather from filing Indian tax returns

Filing of Indian income tax return by non-residents earning passive income in the nature of royalty, fee for technical services (FTS) and interest, subjected to WHT in India, has been a sore point for non-resident tax payers. Such taxpayers either being oblivious of the requirement or otherwise regarding such compliance as an unnecessary burden, in many instances have not been filing the tax return in India. The Government over the last 2-3 years has been focusing on ensuring compliance, even going to the extent of issuing notices for reassessment and making penal provisions stringent to enforce compliance by delinquent tax payers. In a reversal, the Finance Bill (FB) 2020 now proposes to exempts non-residents from tax filing obligation, though with limitations.

Under the extant provisions, non-resident tax payers earning interest and dividend income are exempted from filing tax returns provided appropriate WHT has been deducted [at rate applicable under Double Tax Avoidance Agreement (DTAA) or domestic tax law – as beneficial]. Tax payers earning FTS & royalty income are mandatorily required to file tax return, even if income has been subject to WHT. FB 2020 proposes to materially change this requirement by providing the non-residents an exemption from tax filing in relation to FY 2019-2020 and subsequent years. The exemption will be available where the income is in the nature of royalty/FTS (taxable on gross basis), interest and dividend and WHT has been deducted at the rate prescribed under the domestic tax law (Act), if higher than the rate applicable under DTAA.

For instance, WHT rate for Royalty/FTS in most DTAA is 10% vis-à-vis 10.92% (for foreign companies) under the Act. The exemption from filing will be applicable if WHT has been made at 10.92%. While difference is not stark with respect to Royalty/FTS and non-residents may perhaps consider WHT deduction at higher rate to avail the benefit, adopting the same approach for interest and dividend income will have its limitation. General rate of WHT applicable on interest/dividend income is 21.84% (peak rate for foreign companies) as against 10%/15% applicable under most DTAA [certain categories of interest income is subject to lower WHT of 5% under Act e.g. interest on foreign currency loan, rupee denominated bonds, etc.]. Significant difference in WHT rates would be a dampener leaving non-resident tax payers with limited scope of benefiting from the proposed non-filing regime.

The budget proposal has made a cross-over perhaps benefiting non-resident tax payers earning FTS/royalty income (given lower arbitrage between domestic and DTAA WHT rates) while obligating those earning interest/dividend income to file tax return if they wish to take benefit of lower rates under DTAA. The provisions also leave another area unaddressed i.e. with regard to undertaking transfer pricing compliance even where there is no filing obligation (in absence of specific carve out). Non compliance has significant penal implications.

The Government has apparently taken back, to an extent, what it proposed to give by way of relief to non-resident taxpayers. It may not be ease of compliance yet !

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.