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Budget 2014: Govt should extend Section 80C deduction limit for individuals, says Sanjay Sanghvi

July 9, 2014

As the nation gears up for the first Budget to be presented by the new government and looks forward to the 'ache din' (good days), the following are some key aspects affecting the industry which require urgent consideration and attention of the finance minister.

1. Basic exemption limit and benefit of investments

It is expected that the government would recognise the substantial rise in inflation levels and increase the basic exemption limit of Rs 2,00,000 that is currently available to individuals.

Further, the government should also consider increasing the deduction available to individuals under Section 80C in order to account for inflation and also to promote savings in the form of investments in financial instruments to provide a boost to sectors such as infrastructure, real estate, etc. The government should also consider increasing the quantum of deduction available on interest paid on home loans.


2. The (in)famous 'Vodafone law' - Retrospective amendment

The retrospective amendment brought by Finance Act 2012, which sought to tax 'indirect transfer' of Indian assets by a non-resident, besides raking up a huge debate on the legality of this amendment, also lacks clarity on many counts. One key aspect which requires clarity is the basic threshold that needs to be met for a transaction (indirect transfer of shares/assets in India) to be taxable in India.

As per the current law, any transfer of a capital asset outside India by a non-resident would be taxable in the country if such capital asset derives its value 'substantially' from assets located the country. The word 'substantially' is not defined in this context. The expert committee set up by the government to review the law had recommended a threshold of 50 per cent of the global assets of the company/entity for this purpose. There is an urgent need for the government to clarify the meaning of 'substantial' interest in India.

3. Deduction of 'CSR' payments

The new Companies Act, 2013 requires that companies which fulfill certain conditions, such as having a net profit of Rs 5 crore or more, should spend a minimum two per cent of their 'net profit' for CSR activities.

However, the tax treatment of this expenditure is not clear. While one would like to believe that this expenditure would be allowed as a deduction in computing the taxable profits of the company, the Direct Taxes Code Bill, 2013 in its current form does not allow a deduction for the CSR expenditure in computing the taxable income. In light of the ambiguities prevailing, a clarification under the Income-Tax Act, 1961, regarding the treatment of the expenditure amounts is required.

4. Allowing the deduction for interest cost for acquisition of controlling/strategic interest in businesses

As per the current law, the expenditure incurred on earning tax free income is not allowed as a deduction for computing taxable income. Accordingly, any interest paid on funds borrowed for acquisition of shares is not allowed as a deduction. The government may consider revising this law to allow a deduction of expenditure incurred for the purpose of 'strategic acquisition of shares'. The reason being, the intention of a strategic investor is (usually) not to earn income by way of dividends (which is tax free) but to gain control over the company and to run the business profitably.

The government may specify a minimum threshold of shares (say 26 per cent) for investments to qualify as strategic investments. Indian entrepreneurs as well as established companies, require a lot of funding for the purpose of making new investments. This funding also usually has a huge interest cost attached to it. This interest cost should be allowed as a deduction.

5. Relief from recovery of disputed tax demand while appeal is pending

Many times, in high pitched tax assessments, there is unnecessary pressure on the taxpayers to pay the disputed tax demands even though they have filed an appeal which is being heard by the appellate authority and the ruling/verdict is awaited. In practice, because of the pressure of revenue targets form higher tax authorities, the tax officers express their inability to wait for a few days or few weeks till the verdict of the appellate forum, which has already heard the appeal of the taxpayers, is given.

The Central Board of Direct Taxes should issue instructions to the field officers that where appeal is already heard and the order is awaited, no coercive measure should be taken for recovery of such disputed tax demands till the time the concerned appellate forum has pronounced its verdict/ruling. This would give a huge relief to the taxpayers.

6. Authority for Advance Rulings

The Authority for Advance Rulings (AAR) was set up with the intention of enabling non-residents/foreign investors to get clarity on their tax position in India by seeking advance rulings concerning their transactions/income in the country. However, the effectiveness of this respected forum seems to have diluted in the recent past. Applications for rulings filed by non-residents have been pending for quite some time. The government should expeditiously appoint a Chairman to fill up the vacant post and consider setting up additional benches for speedy disposal of cases. Setting up additional benches of the AAR in other metro cities (Mumbai, Chennai, Kolkata and Bangalore) will also help in reducing the cost of obtaining the ruling.

(The views and opinions expressed herein are those of the author and do not necessarily represent the views of Khaitan & Co.)


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