Knowledge Update April'21

Updated: Apr 17

Table of Content

ECONOMY

Economy Rebounds

After a “harsh winter” Indian economy seems to be back on track, at least the latest GDP figures released by NSO for Oct- Dec Quarter is pointing towards that direction. After two successive Quarters of contraction of economy, the 3rd Quarter recorded a marginal growth of 0.4 % year on year, suggesting that at the very least the economy has reached its pre lockdown level. This was primarily aided by a sharp rebound in construction and manufacturing sectors as well as the festival seasons coinciding with the Quarter.

Construction was up by 6.2 % on Q3 as against a contraction of 7.2% on the preceding Quarter while Manufacturing was up by 1.6 % against a 1.5 % contraction on Q2. Financial, Real estate and Professional Services sector also recorded a turnaround by posting growth of 6.6%.Electricity, water and gas and agriculture, fishing and quarrying were the other sectors that reported positive growth at 7.3 and 3.9 % respectively.

Moreover, capital formation picked up in the 3rd Quarter with a growth of 2.6 % against a 6.7 % contraction in last Quarter due to massive capital push by the Government since October. Festival demand helped private consumption to a rebound from the sharp contraction. Worryingly, however, consumption demand remains stagnant due to lingering effects of the pandemic.

Something along this line was expected as global rating agencies including Moody’s had upwards revised India’s growth estimate. Moody’s had estimated that Indian economy would contract by 7% for FY20 as against earlier prediction of 10.6 % contraction. It also revised India’s growth forecast for FY21 from 10.08 % to 13.7 % due to normalization of activities and base effects.

Fitch, another rating giant has recently pegged India’s growth rate for FY22 at 12.8% citing impressive recovery in Q3 as one of the main reasons. However, experts fear that the economy may again slip into contraction on Quarter 4 due to loss of momentum as well as subsidy payouts.


Crypto Story Not Over

It’s not all over for India’s cryptocurrency story as FM Nirmala Sitharaman clarified that there will be no complete ban on Cryptocurrency, more specifically the technology used by them. Sitharaman stated that the Government will allow experimentation on block chains and cryptocurrency as they are essential to fintech.

Sitharaman said that a Cabinet report detailing India’s cryptocurrency policy is nearing completion, after which it will be taken to Cabinet. However, RBI will take the final call on an official cryptocurrency.

The finance minister stressed that India has an advantage when it comes to crypto technology as lot of fintech companies are conducting various research.

Earlier the Supreme Court in March 2020 has struck down the RBI directive halting bank services for cryptocurrency trading. MoS Finance, Anurag Thakur stated in the parliament that currently the country has no law for governing crypto currency. The new legislation will clear the Government’s stand on the issue.


Draft Ecommerce Policy Seeks to Curb Big Tech Dominance

The Government, through its draft E commerce policy, is seeking to extend restrictions placed on large E commerce marketplaces like Flipkart and Amazon to curb alleged circumvention of FDI policies and prevent anti competitive practices by such players.

A leaked draft of the yet to be released policy states that the Government may from time to time notify parties which are covered by the definition of related parties.

According to a top executive of a leading e-commerce company, if acted upon, such a policy would cause massive uncertainty as the Government can arbitrarily change the definition of related parties forcing companies to go for restructuring, resulting in an environment not at all conducive forbusiness. Instead, the government should clearly define related parties and continue with such definition for at least some years.

The draft policy also aims to curb misuse of data by companies to gain leverage over vendors. It asks the companies to be impartial to all the sellers using the platform. It has been alleged that Amazon favours large sellers like Cloudtail and Appario. Complaints were raised from several quarters over such misuse including complaints from Confederation of All India Traders, Swadeshi Jagran Manch etc. This move is seen as government finally acting on these complaints.

Many felt that although the new policy would clear confusion over data sharing and consumer protection, it will create new complexities as new regulators would be created to oversee compliance.

However, there were still some supporters for the new draft policy as small traders feel that the policy will help curb the dominance of industry behemoth like Walmart owned Flipkart or Amazon and prevent them from monopolizing the whole market.


TATA Goes to CIC to Buy Big Basket

Tata Sons have approached Competition Commission of India to get clearance for its purchase of majority stock in online grocery delivery platform BigBasket. The deal will be carried out through its subsidiary Tata Digital. The deal will mark Tata’s entry into the online grocery retail market which have experienced tremendous growth since the onset of Covid-19 pandemic. The market currently consists of big players like Amazon, Walmart (Flipkart), Reliance etc. It is part of the salt to steel conglomerate’s plan of creating a super app as one stop destination for all its customers as it seeks to compete with bigger retail players like Reliance and Amazon. The 64.3 % stake purchase follows a mixed year for Big Basket which recorded a 36% YoY increase in its revenue to ₹ 3818 Cr for FY 2019-20, however, its losses have also increased by 26 % to ₹ 710 Cr.


Fuel Sales Return to Pre Covid Level

India’s fuel demand which had fallen by a record 45.8 % in April last year due to stringent restriction placed by the nationwide lockdown, has returned to pre covid level except for aviation turbine fuel(ATF). Recovery was expected with easing of lockdown restriction across the country along with the vaccine rollout. Diesel sales were up 7.4 % year on year while petrol had already reached pre - covid level a few months back. LPG sales showed growth even during lockdowns. However, with airlines still not reaching in pre - lockdown levels of operations, ATF sales remain below normal. Industry experts believe that it will take another 3 months before ATF reach normal levels.

DIRECT TAXATION

New Income tax rules to be effective from 01/04/2021

Union Finance Minister Nirmala Sitharaman while presenting Union Budget 2021 had announced numerous changes in the income tax rules which are scheduled to be effective from 1 April 2021.


Let's delve into 5 income tax changes that will come into effect from 1 April:

  1. PF tax rules: Interest on annual employee contributions to provident fund over ₹ 2.5 lakh would be taxed from 1 April 2021 in a bid to tax high-value depositors in the Employee Provident Fund (EPF). However, any person earning less than ₹ 2 lakh per month will not be affected by the proposal.

  2. TDS: In order to make more people file income tax returns (ITR), the finance minister has proposed higher TDS (tax deducted at source) or TCS (tax collected at source) rates in budget 2021. The budget has proposed the insertion of new Sections 206AB and 206CCA in the Income Tax Act as a special provision for the deduction of higher rates of TDS and TCS, respectively for the non-filers of an income tax return.

  3. Senior citizens above 75 years exempted from filing ITR: In order to ease the compliance burden on senior citizens, individuals above 75 years will be exempted from filing income tax returns. The exemption will be available to only those senior citizens who have no other income but depend on pension and interest income from the bank hosting the pension account.

  4. Pre-filled ITR forms: Individual taxpayers will be given pre-filled Income Tax Returns. Details of capital gains from listed securities, dividend income, and interest from banks, post office, etc. will also be pre-filled along with details of salary income, tax payments, TDS, etc. which already come pre-filled in income tax returns. The move is aimed at easing the filing of returns.

  5. LTC: The central government in its Budget 2021 has proposed to provide tax exemption to cash allowance in lieu of Leave Travel Concession (LTC). The scheme is aimed at individuals who were unable to claim their LTC tax benefit due to Covid-related restrictions on travelling.

  6. CBDT notifies new Income Tax Rules & Forms for Trust and NPOs: Form Nos. 3CF, 10A, 10AB, 10AC, 10AD, 10BD, 10BE. Substituted/amended/inserted Rules 2C, 5C, 5F, 11AA, 17A, 18AB .

Coding in Tax Certainty

The Supreme Court has ruled that payments by Indian end-users or distributors of overseas software can’t be considered taxable as ‘royalty’, under tax-treaties containing the definition on the lines of the OECD Model Convention. Only where copyright in the software is permitted to be exploited by the payer, the payment can take the character of royalty and be subject to tax, as per tax-treaties. This came as a solution against a batch of 103 appeals pending before the court.

After two decades of wait, this ruling brings much-needed certainty on characterisation of software transactions, especially for non-resident taxpayers facing the ire of the retrospective amendments, with Supreme Court reinforcing the supremacy of treaty protection. The rationale laid down by the apex court will be relevant for all pending cross-border tax disputes; however, the non-resident taxpayers will have to ensure that they meet the eligibility for treaty entitlement such as beneficial ownership and evidence of a valid tax residency.

The ruling will have an impact on the foreign tax credits (FTC) claimed by non-resident sellers in their home-country against the taxes paid or withheld in India. Such non-residents will have to ascertain the right quantum of FTC credit claimed in their home-country and reversal or reduction of claim.


Supreme Court’s torch-bearing verdict on Software Taxation

In the same judgement, SC declared that the license to use computer software does not constitute a transfer of copyright, either under the copyright law or under the Income Tax law. This is a landmark verdict for India’s tax policy in general, and in particular, for international customary law of treaties. The foremost criticality of the decision is its unambiguous re-endorsement of the application and importance of the double-tax treaties signed by India with more than 80 countries.

The verdict addresses another difficult matter regarding India’s tax policy which relates to its position on international tax principles as expressed in the OECD Model Tax Treaty and its commentary by way of reservations.

Incidentally, though the decision was in the context of tax laws, there were takeaways even for IPR laws. It addresses vexed issues in the realm of copyright law, settling the legal position, which was so far precariously addressed by High Court decisions.

DIRECT TAXATION: Recent development for NRIs

Stress for NRIs stranded in India due to Covid-19

The prevailing Covid situation has thrown up challenges in NRI Taxation. Non Resident Indians(NRIs)who have come to India before or during Covid and were stranded in India for a longer period now run the risk of getting taxed in India for their global incomes. This specially hurts NRIs residing in tax neutral countries like UAE etc.


Under normal circumstances, NRIs are taxed for incomes earned in India. Their incomes from outside India are not taxed in India. However, this changes when an NRI who has come to India in any F.Y. has overstayed in India (beyond 182/120 days) resulting in change of his residential status. Thus, in such circumstances, such an NRI will be required to pay income tax in India for incomes earned in India as well as incomes earned outside India.


A March 3 circular from Central Board of Direct Taxes (CBDT) attempts to address this issue of NRIs overstaying in India due to Covid related travel restrictions.

However, this circular miserably fails and ends up in just clarifying the present tax laws on residential status without giving any relief in this pandemic induced situation.


Petitions have been filed in SC challenging CBDT on the issue of losing their residential status.


Recent Case Laws and Circulars

Karnataka HC: Commission paid by Puma Sports India Pvt. Ltd. to NR-agents for purchase orders outside India are not liable to TDS u/s 195.


DPIIT Note: New FDI Route through NRIs?

Investment made by an Indian entity that is owned and controlled by an NRI on a non-repatriation basis won’t be considered for the calculation of indirect foreign investment, the DPIIT said in a notification.

This is a welcome move and it will encourage larger participation from NRIs in the growth of Indian economy.

INDIRECT TAXATION - GST

UPI QR Code soon to include GST

The Government is planning to upgrade the QR code for UPI in such a way that GST component can be incorporated and shown separately. This will enable the government to come out with fiscal incentives for payments that are made digitally.

The National Payment Corporation of India (NPCI) is working on UPI to enable this feature according to CEO Dilip Asbe. Mr. Asbe is optimistic about the boundless innovation that can occur since both ends of payments are driven by software with information going to a cloud.


GST e-invoicing obligatory from 1st April 2021 for entities having at least ₹ 50 Cr

E-invoicing under the GST regime will become mandatory for entities having a turnover of minimum ₹ 50 Cr from April 1 for business to business transactions, the government said in a notification on Monday. This will be the third phase of e-invoicing roll out, which was rolled out for entities with atleast ₹500 cr turnover from October 1 last year and later extended to entities with ₹ 100 cr and above from January 1 this year. The government had earlier planned to extend e-invoicing to all entities from April 1, 2021, but has refrained, taking care of interest of small entities.

The system is aimed at bringing in more transparency in sales reporting, minimising errors and mismatches, automating data entry work, and improving compliance. It will help prevent tax evasion once it is made mandatory for small and medium firms in phases.

The Government’s idea to make this obligation applicable to all business-to-business deals later this year implies its intention to formalize the economy through GST. This will also demolish the practice among small businesses of issuing informal sales invoices to under report turnover.

According to M.S. Mani, partner, Deloitte India, “The extension of e-invoicing across all business transactions over a period of time would make GST one of the most advanced information technology-enabled indirect tax system among countries of comparable size and diversity”.

GST Council to decide on GST on oil

According to finance minister Nirmala Sitharaman, the government is not yet ready with a plan to include auto fuels under the GST regime but indicated that it might take a call on the issue closer to the GST Council meeting. However, she was non committal on whether the states would be compensated for any revenue shortfall arising due to inclusion of these fuels under GST. Since a major part of the Centre’s taxes on the fuels are not shared with states (GST receipts are shareable), it would also have to assess the revenue implications of the move.


Provisional Attachment of Property

The Central Board of Indirect Taxes and Customs (CBIC) has come out with guidelines for provisional attachment of property under GST Act which tasks the Commissioner to exercise due diligence and carefully examine all the facts of the case, including the nature of offence and amount of revenue involved, and also record on file the basis on which he/she has formed such an opinion to attach property of the taxpayer. However, in order to do so, the field offices of CBIC should exercise utmost prudence and maximum caution.

The following are the types of cases where provisional attachment can be considered to be resorted to subject to specific facts of the case:

  • A taxable person has supplied goods or services or both without issue of any invoice with an intention to evade tax;

  • A taxable person has issued invoice or bill without supply of goods or services or both;

  • A taxable person has fraudulently availed input tax credit;

  • A taxpayer has collected amount as tax but has failed to pay the same to the government beyond a period of three months from the date on which such payment becomes due; or

  • A taxable person has fraudulently obtained refund; or

  • A taxable person has passed on input tax credit fraudulently to the recipients but has not paid the commensurate tax.


Madras HC allows claiming input tax credit on TDS from VAT

The Madras High Court, after hearing 23 petitions filed by assessees under the Tamil Nadu Goods and Service Tax Act, 2017 (TNGST Act), has allowed assessees to claim input tax credit for tax deducted at source (TDS) pending from the value-added tax (VAT) regime under the current goods and services tax (GST) system.

The order stated that any deduction made towards an anticipated tax liability assumes the character of tax. Thus, TDS would stand included for transition into the GST law.

The petitioners’ counsel submitted that TDS is nothing but tax and is backed by the TNVAT Act.

The counsel also argued that TDS is a tax since deduction of tax at source is only a mechanism to ensure advance payment and collection of tax without leakage.

BUSINESS MANAGEMENT

There is no “I” in Team

A tortoise asked two geese to take him south with them. At first, they resisted; they didn't see how it could be done. Finally, the tortoise suggested that the two geese hold a stick in their beaks and that he would hold on to it with his mouth.

So, off the unlikely threesome went, flying south over the countryside. It was quite a sight. People looked up and expressed great admiration at this demonstration of creative teamwork.

Someone said, "It's wonderful! Who was so clever to discover such a fine way to travel?" Whereupon the tortoise opened his mouth and said, "It was I," as he plummeted to the earth.

NEWS IN FOCUS

Impact of Suez Canal Blockage on Global Trade

The 400-metre long container vessel, MV Ever Given, was finally freed 6 days after it completely blocked Egypt’s Suez Canal. It took rigorous efforts to refloat the massive cargo ship (2.2 lakh tonne) that got diagonally stuck on the all-important 193-km narrow waterway on March 23.

While normal traffic has now resumed, the ship blockage resulted in massive economic loss — hundreds of ships ferrying cargo worth billions were either stuck in traffic or forced to reroute, causing significant delays in essential shipments.

The Suez Canal blockage roughly cost 12% of global trade and was holding up trade valued at over $9 billion per day, according to data from Lloyd’s list. The total trade loss has been estimated at roughly $54 billion.

This blockage could shun global trade growth by 0.2 to 0.4% on an annual basis.

Experts feel that the incident could inflate prices of some commodities and goods like coffee, toilet paper, furniture, gym equipment etc.


Nazara Technologies IPO oversubscribed by 176 times

The IPO of Nazara Technologies, India’s first gaming technology company going public was oversubscribed by 176 times suggesting great investor confidence on both the company’s prospects as well as the potential of India’s gaming industry.

Backed by ace investor Rakesh Jhunjhunwala, who owns a little over 10% stake in the company, the IPO was expected to fetch ₹ 583 Cr.

The Stock, listed in NSE and BSE, began trading at ₹ 1971/share, up ₹870 or 79% from the IPO price of ₹1,101 per share. According to industry experts, Nazara shares have both long-term potential as well as possibility of listings gains. Experts expect strong growth from the company in the next 2-3 years. The trading price of each share were ₹1,662 and ₹1,664 in NSE and BSE, respectively, as on 1st April, 2021.


Audit Trail in Accounting Software

The Ministry of Corporate Affairs has mandated that all companies using accounting software for accounting purposes should have audit trail and transaction log features in their software. The move is expected to prevent unrecorded transactions and backdated entries, thereby preventing fraud. Moreover, the MCA states that such audit trail feature should not have disable option.

This is likely to create huge compliance burden on companies particularly, smaller ones, as now they have to procure software which meet the requirements. Most of the commonly used ERP systems either don’t have audit trail feature or have audit trail feature which can be disabled, the latter being the case for market leader Tally Solutions which has a 75% market share. Many believe that instead of a blanket rule the Govt. should have specified a turnover threshold. One of the few financial software to meet the specified requirement is Zoho Books by Indian IT company Zoho.

In a major relief, applicability of this stipulation has been deferred for 1 year to 01/04/22.


Amendments in Schedule III to the Companies Act, 2013

As per the amendments, many new disclosures have been made mandatory out of which few major ones are discussed hereunder:

  • Disclosure of shareholding of promoters

  • Trade payables and trade receivables ageing schedules with age 1 year, 1-2 year, 2-3 years and more than 3 years

  • Reconciliation of the gross and net carrying amounts of each class of assets

  • Details of benami property held

  • Detailed disclosure regarding title deeds of immovable property not held in name of the company.

AT A GLANCE:AMENDMENTS IN FINANCE BILLS 2021

FMV of capital assets transferred under slump sale to be calculated in prescribed manner

The term ‘slump sale’ has been defined under section 2(42C) to mean the transfer of one or more undertakings as a result of sale for lump sum consideration. Some courts have taken a view that transfer by way of exchange, relinquishment etc. shall not be considered as slump sale. To provide clarity on this issue, Section 2(42C) was proposed to be amended by the Finance Bill, 2021 to provide that all types of ‘transfer’ as defined under section 2(47) shall be included within the scope of slump sale.


The Bill has amended Section 50B(2) to provide that the fair market value (FMV) of the capital assets (being an undertaking or division transferred by way of slump sale) as on the date of transfer shall be calculated in the prescribed manner. Such FMV shall be deemed to be full value of the consideration received or accruing as a result of transfer of such capital asset.


Tax on Interest earned on PF contribution

The Finance Bill, 2021 proposed amendment to Section 10(11) and Section 10(12) that no exemption shall be available for the interest income accrued during the previous year in the recognized and statutory provident fund to the extent it relates to the contribution made by the employees over ₹2,50,000 in the previous year. This amendment is applicable from the AY 2022-23.


The Bill has added a 2nd proviso to Section 10(11) and Section 10(12) that if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee to that fund in excess of ₹5,00,000 in a financial year. The interest income shall be taxable under the head ‘Income from other sources’.

This amendment can be better understood from the following illustration:


Late Fee for Default in furnishing Return of Income

The late filing fee under Section 234F is charged when a person fails to furnish a return of income by the due date prescribed under section 139(1). The fees to be charged depends on the quantum of income and the date of filing of return of income.


The Finance Bill, 2021 had proposed to reduce the time-limit to file belated or revised returns of income, as the case may be, by 3 months. Therefore, the last date to file the revised or belated return shall be 31st December of the relevant Assessment Year.


The Finance Bill (Lok Sabha) has made a consequential amendment to Section 234F that the late-filing fee shall be ₹5,000. However, where the total income of a person does not exceed ₹. 5 Lakhs, the fee payable shall not exceed ₹1,000. After, the amendment, the late-filing fee shall be leviable in the following manner:


Tax Audit

A new proviso has been inserted in the Finance Bill (Lok Sabha) that for computation of the higher threshold limit of ₹10 Cr, the payment or receipt settled through a non-account payee cheque or a non-account payee bank draft shall be deemed to be cash payment or cash receipt respectively. Thus, the same shall be included while computing the 5% cash transaction limit.


Fee for default in linking Aadhaar and PAN

It is mandatory for every person, who is eligible to obtain Aadhaar, to quote the Aadhaar Number in the Income-tax return and in the application for allotment of PAN. Further, every person who has been allotted PAN as on July 1, 2017, and who is eligible to obtain Aadhaar number, shall link his PAN with Aadhaar.


In case, assessee fails to do so, the PAN allotted to the person shall be made inoperative after the notified due date (30-06-2021).


The Bill has inserted a new Section 234H to levy a fee for default in intimating the Aadhaar Number. Therefore, if a person fails to link PAN-Aadhaar by 30-06-2021, he shall be liable to pay a fee, maximum of ₹1,000.


Further, where a person is required to furnish, intimate or quote his PAN, and his PAN has become inoperative, it shall be deemed that he has not furnished, intimated or quoted the PAN. Consequently, he shall be liable for all the consequences for not furnishing, intimating or quoting the PAN.


NRIs are eligible to apply for Aadhaar & consequently, the linking of PAN with Aadhaar provision shall apply to them as well.

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