Budget 2014: Amended Finance (No. 2) Bill, 2014 passed in the Lok Sabha and Rajya Sabha

The Indian Finance Minister (FM), Arun Jaitley, presented the Union Budget 2014-15 on 10 July 2014. The Lok Sabha (the lower house of Parliament) passed the amended Finance (No. 2) Bill, 2014 on 25 July, following which the Rajya Sabha (the upper house of Parliament) cleared the Bill on 30 July. The President’s assent is awaited now.

The FM had proposed a few amendments in his Budget Speech; however, these were missing in the fine print. Furthermore, various trade bodies and professional associations had made representations to the FM for amendments in the proposals mooted by him. The passed Bill now includes some of these amendments. In this alert, we discuss the key amendments to the Bill with respect to the Direct and Indirect Tax proposals.

DIRECT TAXATION

1. Taxation of Capital Gains

A. Period of holding of unlisted shares and non-equity oriented mutual funds

Unlisted shares and units of debt funds were considered as short-term capital assets if held up to 12 months. The bill had proposed to increase the period of holding from 12 months to 36 months with effect from 1 April 2014. This had raised doubts amongst investors on whether the transfers made between 1 April 2014 and 10 July 2014 would be liable to short-term capital gains, if held for more than 12 months but less than 36 months.
The passed/approved Bill has provided that the above amendment shall not be applicable to transfers made between 1 April 2014 and 10 July 2014. Thus, gain arising on any transfer of unlisted shares or redemption of debt funds prior to 10 July would be regarded as long term if held for more than 12 months.

B. Capital gains tax on sale of debt-oriented mutual fund units

Under the existing law, capital gains arising on transfer of units of debt funds held for more than 12 months were taxed at a concessional rate of 10% without any indexation benefit, or at a rate of 20% with indexation.
It was proposed to do away with the concessional rate of tax of 10% for such units and to tax them at normal rate of tax of 20% applicable to long-term capital gains. The amendment was also proposed to be effective from 1 April 2014.
Considering the concerns amongst investors, the passed Bill has provided that this amendment too shall not be applicable on transfers made between 1 April 2014 and 10 July 2014, thereby the transfer of units of debt funds held for more than 12 months and made between this period would be eligible for a concessional rate of 10% tax, if the same is more beneficial.

2. Determination of arm’s length price in case of an international transaction

The FM in his Budget Speech had proposed the introduction of the price range concept for determination of arm’s length price (ALP) in an international transaction. However, there were no provisions to this effect in the Finance Bill presented on 10 July 2014.
As expected, the approved Bill has proposed to insert a new proviso, providing that where more than one price is determined by the most appropriate method, the ALP in relation to an international transaction or specified domestic transaction shall be computed in such manner as may be prescribed. The new mechanism of computation will be notified by amending the Income Tax Rules.
This amendment has also resulted in replacing the existing provisions of determining the ALP having regard to the arithmetic mean and tolerable range. This should bring substantial relief to taxpayers in terms of transfer pricing adjustments.

3. Amendments in provisions related to Advance Rulings

A. Resident applicants can obtain an advance ruling

The FM in his Budget Speech had mentioned to extend the scope of advance rulings so as to cover the transactions undertaken by a resident taxpayer above certain threshold limits. This would enable the resident taxpayers to obtain an advance ruling in respect of their tax liability. However, there was no such enabling provision in the Finance Bill.
The relevant amendment is now included in the amended Bill. It is proposed that from 1 October 2014, a resident applicant can also make an application to the Authority for Advance Rulings (AAR) in relation to a tax liability arising out of transactions undertaken or proposed to be undertaken.
The Central Government shall notify the resident applicant who would be eligible for obtaining a ruling from the AAR.

B. Setting up additional benches for strengthening the AAR- As a measure to strengthen the AAR, the FM has proposed to set up additional benches. However, an enabling provision was absent in the Finance Bill. The approved Bill now includes the following changes to strengthen the AAR:

Number of members

o Under the existing provisions, the AAR would consist only of three members, a Chairman, an officer of Indian Revenue Service and an officer of Indian Legal Service.

o The amended Bill now provides that an AAR shall consist of a Chairman and such number of Vice Chairmen, revenue Members and law Members as the Central Government may, appoint, by notification.

o The amendment also specifies the eligibility criteria for members of AAR.

Additional benches of AAR

o It is further proposed to constitute the benches of the AAR at such places as may be notified by the government.

4. Extension in scope of the Settlement Commission

During the Budget Speech, the FM had mentioned that the scope of the Settlement Commission (SC) would be enlarged to enable the taxpayers to approach it for settlement of disputes and also to make it more effective. However, there was no mention in the Finance Bill in this regard. The amendment has now been included in the passed Bill.
The amendment provides that from 1 October 2014, a taxpayer can apply for settlement even in cases where:

o reassessment proceedings are initiated, or

o proceedings for making fresh assessment are undertaken in pursuance of revision/rectification orders of higher authorities setting aside or cancelling an assessment.

Similar changes have been made in the Wealth Tax Act as well for settlement of cases.
It is pertinent to note that this will be a once-in-a-lifetime opportunity for any taxpayer.

5. CBDT empowered to relax the fees applicable to TDS defaults

The Income Tax Act provides for levy of a fee of INR 200 for each day’s delay in filing the quarterly statement/return of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS).
Levy of such fees has been a matter of litigation with the tax deductors objecting such a levy and filing stay petitions before the High Courts. Until now, three writ petitions have been filed before the Bombay, Rajasthan and Karnataka High Courts. The petitioners have questioned the constitutional validity of such levy.
The petitioners have also claimed that taxpayers who are deducting tax at source are discharging an administrative function of the department and that they are an ‘honorary agent’ of the department. It is stated that this is an onerous obligation and that there are already numerous penalties prescribed for a default. It is also stated that the fee now levied by section 234E is ‘exponentially harsh and burdensome’ and also ‘deceitful, atrocious and obnoxious’. It is also claimed that the Parliament does not have the jurisdiction or competence to impose such a levy on taxpayers.
All three courts have granted an interim stay on the recovery of such levy.
Considering the inconvenience caused to the taxpayers as well as the number of litigations invited by the said levy, the Bill has brought in an amendment empowering the Central Board of Direct Taxes (CBDT) to relax the fees applicable for defaults in furnishing TDS/TCS payments.

INDIRECT TAXATION

1. Pre-deposit under Customs Act, 1962 and Central Excise Act, 1944[1]

Proposed amendments to section 129E of the Customs Act, 1962 and section 35F of the Central Excise Act, 1944 deal with the requirement of prescribed pre-deposit. In view of the terminology used earlier, there was debate whether the prescribed 7.5% and 10% would apply on duty demanded or penalty imposed or both.
Now, it is provided that the mandatory pre-deposit is payable as under:

o In case duty or duty and penalty is in dispute: 7.5% and 10% on duty amount

o In case penalty is in dispute: 7.5% and 10% on penalty amount

Thus, the amended provisions provide much-needed clarity and relief as in cases where duty or duty and penalty is in dispute, pre-deposit would be leviable only on the duty amount.

2. Interest on pre-deposit introduced

At present, interest is payable to the appellant from a date after three months from the receipt of the appellate order in case of an amount.
Now, interest shall be paid to the appellant from the date of payment of the pre-deposit amount till the date of refund. In this regard, the rate of interest[2] shall be notified by the government. This amendment shall be applicable on deposits made on or after the Bill is enacted.

3. Application fees of INR 500 for stay omitted

According to the current provisions under section 129A of the Customs Act, 1962 and section 35B of the Central Excise Act, 1944 a fee of INR 500 is required to be made on an application with the Appellate Tribunal, inter alia, relating to grant of stay.
Now, the provision of payment of fees of INR 500 for grant of stay has been omitted.

________________________________________

[1] Section 83 of the Finance Act, 1994 makes section 35F of the Central Excise Act applicable to appeals under service tax legislation as well

[2] To be between 5 and 36 per cent