Ashes to Dust - expectations that crumble

Budget wish lists are put forward every year. If any representations make the grade, there is euphoria and those that do not make it are put aside and forgotten. Talking of tolerance these days, business India is the most tolerant community when it comes to demands for amendments in the Income-tax Act, 1961 (the Act), year on year, which do not see the light of day!

Here are, in my view, the top four critical aspects in the Act that have pained tax payers for years but have slipped between the representation cracks.

1.    Section 79 is the provision that deals with denial of carry forward losses if beneficial holding exceeding 51 per cent changes hands in a private limited company. Representations to either delete this provision or at least make it more specific as a pure anti-avoidance measure was first mooted by the famous Chelliah Committee in its report in 1994, the first formal tax reforms committee that had recommended path-breaking reform measures, some of which were implemented (e.g. considering dividends tax-free to overcome economic double taxation was mooted by this committee). The point made then - and remains relevant now - was that every change of beneficial holding, even legitimate business restructuring, gets caught within the ambit of this section. Now that General Anti-Avoidance Rules have found their way in the statute book effective April 1, 2017, this provision should see sunset - but remains lost in the sands of time.

2.    The infamous Explanation 6 to section 9(1)(vi) was inserted by Finance Act 2012 with retrospective effect from June 1, 1976 with the words "for the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (…..), cable, optic fibre or by any other similar technology…….."[Emphasis provided]. The astonishment that did the rounds then was on the fact that certain technologies that were "deemed to have always (been) included" in the definition of royalties retroactively from June 1976 were not in vogue, perhaps not even invented, during that time but the legislature chose to include them retroactively with an obvious intent of overruling certain Apex Court judgements that did not favour the revenue department's attempt to illegitimately collect taxes. This provision and, indeed, certain others have met with considerable backlash from industry and the academia as retrograde. However, many such retroactive amendments have not been reversed in both government regimes thus far, notwithstanding certain grand declarations - therefore remain conspicuously present.

3.    The same Finance Act of 2012 let out yet another rabbit from the hat through Explanation 5 in section 9(1)(i) of the Act, in terms of which transfer of shares or interests in a company outside India is subjected to capital gains tax in India if such shares derive their value directly or indirectly from assets located in India. The legislators, in their wisdom, viewed the infamous Vodafone ruling of the Apex Court and made these amendments around it in an attempt to bring those transactions into the tax net. However, the short-sighted application of mind (or the lack of it) resulted in mass confusion for all innocuous and innocent transfer of shares outside India. As if that were not enough, the amendment was effective retroactively from 1961. Once again, the backlash against this amendment made no difference. In spite of several representations and even official committee recommendations seeking clarification to ease severity of the provision, the law remains unchanged.

4.    Section 72A relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation is an extremely progressive but equally underutilised provision. The motive is very noble in that it seeks to incentivise the takeover of non-profitable and defunct businesses. However, certain conditions around continuance of the defunct business and the amalgamated company assets dilute the intent of the provision considerably. The plea over the years has been to liberalise the conditions and provide leeway to acquirers to take rational business decisions rather than be bogged down by restrictive tax conditions stipulated in the section. However, there has been no move at all to relax these stringent conditions thereby keeping the section pathetically underutilised. Further, the section continues to refer to "Industrial undertakings" for eligibility of the benefit. The service industry today constitutes almost 59 per cent of the GDP of India but the provisions of the Act, and particularly section 72A, remain in prehistoric times - but that does not deter the legislators even now.

….and so several aspirations continued to be buried deep!

The author is Partner, Grant Thornton India LLP