c.v.o. ca’s news & views vol. 21 no. 9 / march 2018 · c.v.o. ca’s news & views vol. 21...

C.V.O. CA’S NEWS & VIEWS VOL. 21 NO. 9 / MARCH 2018

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From the desk of Chairman

NEWS BULLETINCOMMITEE

ChairmanCA Dinesh Shah

Office BearerCA Sunil Dedhia

AdvisorCA Manoj Shah

ConvenorCA Harsh Dedhia

Jt. ConvenorCA Jigar Chheda

MembersCA Hitesh Pasad

CA Bhavin DedhiaCA Kaushik GadaCA Nikita GogriCA Sagar MaruCA Virav DedhiaCA Zalak Savla

Sp. InviteesCA Rakesh Vora

C O N T E N T S

ASSOCIATION NEWS

Forth ComingEvents ........................... 4

EventsRetrospect ..................... 5

New MembersEnrolled .......................... 6

A R T I C L E S

Finance Bill 2018 –Brief Analysis ofSome ofThe ImportantProvisions ...................... 7

Impact ofFiscal Deficiton the Economy ......... 24

LEGAL UPDATES

Updates onGST ............................. 28

FEMA Updates ............ 29

Friends, continuing with the previous month's discussion for environmentprotection, small steps in changing daily habits, eating habits etc. are easier thanyou might think. To help save the environment, try decreasing energy and waterconsumption, changing our eating and transportation habits to conserve naturalresources, and adapting our home to be more environmentally friendly. Oncewe've made our lifestyle environmentally conscious, we can also engage inactivism to help educate others on doing the same.

1. Switch off anything that uses electricity when not in use. If we are not usingit, turn it off. This holds for lights, televisions, computers, printers, and soon. Or we can use instruments having timers to control the powerconsumption.

2. Unplug devices whenever and wherever possible. Leaving devices pluggedin, such as laptop chargers or toasters, can use "phantom" energy. Evenwhen an appliance is turned off, it may still use power because theapplications on the electronics will constantly use electricity. It is best tounplug anything that we do not anticipate using in the next 36 hours (ormore). Or using a power strip to turn lots of things off.

3. Minimum use of air conditioners. Air conditioners use a great deal ofelectricity. Use natural ventilation or a fan to keep cool as much as possible.In case if we use an air conditioner, set it to a slightly lower temperaturethan outside. Remember that setting the temperature further lower usesmore electricity, and it won't cool things off any faster.

4. Say no to use of electronic exercise machines. Instead of using exerciseequipment, use a real bicycle (or a unicycle), or walk to get to nearbydestinations or for pleasure.

5. Conserve water. The average family of four consumes 700 to 900 litres ofwater every day. Make conscious choices to lower consumption of water by-

Taking shorter showers or filling the bucket as required,

Turning off the tap while we brush our teeth or shave,

Installing low flow taps or aerators, low-flow shower heads, and low-flush toilets,

Running our dishwasher machine and washing machine only when it iscompletely full,

Using minimum water for car wash, and if possible near any open space(not of cement concrete) or lawn so that washed water is not drained.

ENVIRONMENT PROTECTION - PART 2

VOL. 21 NO. 9 / MARCH 2018 C.V.O. CA’S NEWS & VIEWS

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Compiled by :CA. Harsh DedhiaCA. Jigar Chheda

ASSOCIATIONNEWS

YOUNG AND INDUSTRY MEMBERSEMPOWERMENT COMMITTEEEvent Yoga by the Bay - Part 2Date 25th March, 2018Faculty Dr. CA Kishor GadaVenue Shivaji ParkFees Rs. 100/- per person

YOUNG AND INDUSTRY MEMBERSEMPOWERMENT COMMITTEEEvent Car Treasure HuntDate 22nd April 2018Fees Rs. 100/- per person

(Max 5 in car)

FORTHCOMING EVENTS

6. Use paper napkins only as much as you need. Go easy on the paper towels, too, and use awashable cloth or sponge for most of the kitchen cleanup. They are inexpensive, especiallywhen bought in bulk, and can be washed and reused no of times. If you need to use paperproducts, look for products made from recycled paper.

7. Be a mindful consumer. Please ask us if purchases are impacting other people and the naturalenvironment. Do not buy what you do not need. Besides saving money, we 'll be savingresources Buy for durability, which will make a product last longer. Buying reusedconsumable is a far higher purpose for used goods than the landfill, plus you'll save money.Could you borrow something, get it used, or simply do without it?

8. Stop your junk mail from coming. If you get several catalogues which you do not need, call andask them to stop sending them to you.

9. Buy local food. Transporting food from far-off locations takes a toll on the environment, as itmust be shipped in trucks, by rail or by ship, all of which produce pollutants. Buying food thatis sourced locally will help eliminate or reduce transportation impact. Visit farmers marketsto find local vegetables and fruits or use community-supported agriculture service to get freshproduce on a regular basis.

10. Don't waste food. Plan your meals so that you don't cook more than you will eat. If you do havean over-run of food, such as after a party, share it with friends.

11. Don't use polybags. Even though they can be found easily, they are not eco-friendly.

12. Avoid palm oil! Palm oil is collected from oil palms in parts of Indonesia and Africa and is thenumber one cause of rainforest deforestation. Check the ingredients of your food andcosmetics; avoid companies that export large amounts of palm oil such as PepsiCo and Nestle.However, support companies like the Gap and Coca Cola who have avoided palm oil.

13. Consider a vegan lifestyle. A vegan diet may be less harmful to animals and the environment.

14. Collect rain water and use it for a variety of purposes (like gardening, cleaning, or bird bath).

15. Turn off your vehicle when you are going to stop at any place for more than 10 seconds.

There's much more we can do. But this is a start to a sustainable living!

MUMBAI CA DINESH SHAH


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CA GALA ROMIL RAJESHPRAGPURMalad - West, Mumbai 400064Mobile : 8080727472Email : [email protected]

CA DEDHIA DHRUMI CHETANDESHALPURMatunga (CR), Mumbai - 19Mobile : 8108481698Email : [email protected]

CA MARU DEEPAK VISHANJIKODAYBorivali - East, Mumbai 400068Mobile : 9930267540Email : [email protected]

NEW MEMBERS ENROLLEDCA VIRA KREENA HIRENBHINSRAMira Road - East, Thane - 401107Mobile : 9699009630Email : [email protected]

CA GALA JUGAL DHANJIKHAROIThane- West - 400601Mobile : 9664325802Email : [email protected]

CA NAGDA VAIBHAV NARESHDUMRAGhatkopar - East, Mumbai - 400075Mobile : 9969540404Email : [email protected]

EVENTS IN RETROSPECTDadar East CPE Study Circle, jointly with WIRC of ICAI, organized a 4-day Residential Refresher Course (RRC) from22-25th February 2018 at Club Mahindra Emerald Palms, South-Goa. The program was a perfect blend of relaxationat the same time a hard core learning experience. We had perfect blend of all participants, with youngest member of25 years to most senior member of 65 years. Some members represented industry and few were practicing charteredaccountants.In all 85 participants took benefit of best in class faculties, with some of the speakers as young as 29 years and the mostexperienced ones at 55-60 years. We had a rare opportunity to have CA Mukund Chitale (PP-ICAI) with us, who sharedhis vast experience and gave his view on what he sees the future of CA profession. His talks were eye-opening, especiallythose who are in traditional practice. He very well covered what he perceives, the auditing and accounting professiongoing forward in such fast changing world.We had very knowledgeable authority on Direct Tax, CA Padamchand Khincha, who designed the most detailed casestudies on various controversial topics of Direct Tax. He covered area such as Gift, exemption to Trusts, Key deductions,JDAs, etc. All his case studies, especially, case studies on Gift, were highly appreciated. All groups, under very wellprepared 6 group leaders, had intense discussions on all these case studies, before the speaker gave his view on the same.GST, a newly introduced law, is now settling down. Considering this, we had a panel discussion on certain frequentlyencountered issued being faced by the practitioners. Knowledgeable speakers, CA. Ashit Shah, CA. Sanket Desai, CA.Shreyas Sangoi, CA. Kewal Satra, clarified all the doubts of participants.CAs are facing difficulties in understanding and implementing IndAS. We invited CA. Himanshu Kishnadwala, whocovered gist of all IndAS in very short time and shared his experience on implementation difficulties being faced by all.He also shared his views on how to grow practice and gave tips for better and professional Practice management.As all the learning session were planned in early morning between 8 am to 1 pm, participants had sufficient time torelax and enjoy the club facilities. Members were seen taking advantage of pools, games, Spa and other facilities. Someof the senior members even rocked the dance floor. Participants went to explore nearby beaches and had a gala timeenjoying water sports.


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NEW MEMBERS ENROLLEDCA GADA ANKIT NIRANJANBIDADADombivli - East, Thane 421201Mobile : 9821190826Email : [email protected]

CA CHHEDA NILESH DAMJIKANDHAGARASantacruz- West, Mumbai - 400054Mobile : 9619743312Email : [email protected]

CA DEDHIA ANKITA SURESHKODAYSangli - 416416Mobile : 9970188600Email : [email protected]

CA SHAH JITENDRA PUNSHITALWANAMatunga - West, Mumbai 400016Telephone : 24463160Email : [email protected]

CA SAVLA SHAILI BIPINBIDADASantacruz- East, Mumbai - 400055Mobile : 9833508285Email : [email protected]

CA CHHEDA GRISHMA RAJESHRATADIAGhatkopar - East, Mumbai 400086Mobile : 8767338388

CA MAMANIA RUSHABH BHUPENMERAVAGrant Road - West, MumbaiMobile : 9594866895Email : [email protected]

CA VIRA NIDHI PRAVINDEVPURGrant Road - West, Mumbai 400007Mobile : 9820489048Email : [email protected]

CA CHHEDA AMI GIRISHNANA ASAMBIASandhurst Road, Mumbai 400009Mobile : 9820323344Email : [email protected]

CA RAMBHIA BHAVYA SMITSAMAGHOGASandhurst Road, Mumbai 400009Mobile : 9833940401Email : [email protected]

CA DEDHIA JEKIN RAJESHNANA RATADIAGhatkopar - East, Mumbai 400077Mobile : 80804 40171Email : [email protected]

CA MALDE VINIL KETANLUNIChinchpokli, Mumbai 400012Mobile : 9699967060Email : [email protected]

CA SATRA KRUPA GIRISHLUNI,Bhandup- West, Mumbai, 400078Mobile : 9969496384Email : [email protected]

CA CHHEDA JEEL HARESHMOKHADadar - East, Mumbai - 400014Mobile : 9869023200Email : [email protected]

CA SHAH BIJAL ANKITNAREDIMulund - West, Mumbai 400080MObile : 9920083951Email: [email protected]

CA SATRA JAINAM MUKESHDONDombivli - East, Thane 401201Mobile : 9821106526Email : [email protected]

CA HARIA KEVAL KETANSHERDI400055Mobile : 9769560333Email : [email protected]

CA KARANI PURAV JAYANTIDUMRAMulund - East, Mumbai 400081Mobile : 9820847235Email : [email protected]


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Section 2(22) & Section 115-O : DeemedDividend and Tax on distributed profits ofDomestic Companies :Section 2 of the Act defines various terms usedin the Act. Clause (22) of the said sectiondefines “dividend” to include distribution ofaccumulated profits (whether capitalized ornot) to its shareholders by a company, whetherit is in the nature of,—

(i) release of all or any of its assets,

(ii) issue of debentures in any form (with orwithout interest) or distribution of bonusto its preference shareholders,

(iii) distribution of proceeds on liquidation,

(iv) on the reduction of capital, or

(v) in the case of an unlisted company, anyloan or advance given to a shareholderhaving shareholding of 10% or above, or toa concern in which such shareholder holdssubstantial interest (exceeding 20% ofshareholding or interest) or any paymentby such company on behalf of or for theindividual benefit of such shareholder.

Explanation 2 provides the definition of theterm ‘accumulated profits’ for the purposes ofthe said clause, as all profits of the company upto the date of distribution or payment orliquidation, subject to certain conditions.

The loans or advances granted by a closely heldcompany to certain shareholders or concernswherein such shareholders have a substantialinterest are considered as deemed dividend asper sub-clause (e) of Section 2(22). Presently,such deemed dividend referred to in Section2(22)(e) is not subject to Dividend DistributionTax (DDT) under Section 115-O and is taxablein the hands shareholder/recipient at theapplicable rate.

Clause – 3 of the Finance Bill seeks to insert anew Explanation 2A in clause (22) of section 2of the Act to widen the scope of the term‘accumulated profits’ so as to provide that in the

FINANCE BILL 2018 – BRIEF ANALYSIS OFSOME OF THE IMPORTANT PROVISIONS

case of an amalgamated company, accumulatedprofits, whether capitalised or not, or losses asthe case may be, shall be increased by theaccumulated profits of the amalgamatingcompany, whether capitalized or not, on thedate of amalgamation.

Recently, Supreme Court in Gopal & Sons(HUF) vs. CIT has dealt with several issuesregarding taxability of such deemed dividendlike applicability of provision where the shareswere issued in the name of Karta of HUF andsimilarly in the case of CIT vs. MadhurHousing & Development Co , the person whoshould be taxed in case where loan was given tothe concern in which the shareholder had thesubstantial interest. Considering suchextensive litigation with regard to taxability ofdeemed dividend under Section 2(22)(e), it isproposed to shift the burden of tax on it to thecompany in the form of DDT. The followingamendments have been proposed with effectfrom 1st April, 2018 in this regard:

The definition of “dividend” in the Explanationbelow Section 115Q which referred in turn toSection 2(22) but other than its sub-clause (e)has been omitted. Thus, all types of dividendsincluding deemed dividend falling under sub-clause (e) of Section 2(22) shall be subject toadditional tax under Section 115-O.

The DDT @30% is payable on such deemeddividend under Section 2(22)(e) but withoutgrossing up.

Such deemed dividend will be exempt underSection 10(34). Further, provisions of Section115BBDA are not applicable to deemeddividend falling under sub-clause (e) of Section2(22).

Instances have come to light wherebycompanies are resorting to abusivearrangements in order to escape liability ofpaying tax on distributed profits. Under sucharrangements, companies with largeaccumulated profits adopt the amalgamation

Contributed by :CA Haresh P. Kenia(a member of the association)

he can be reached [email protected]


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route to reduce capital and circumvent theprovisions of sub-clause (d) of clause (22) ofsection 2 of the Act. With a view to preventingsuch abusive arrangements and similar otherabusive arrangements, this amendment isproposed. The proposed amendment seeks tooverrule the decision in the case of Asst. CIT v.Gautam Sarabhai Trust No.23 (2002) 81 ITD677(Ahd)

This amendment will take effect from 1st April,2018 and will accordingly apply in relation toassessment year 2018-19 and subsequentassessment years.

Section 112A - Tax on long term capitalgains in certain cases (Clause 31)Section 10(38) currently provides forexemption in respect of long term capital gainsin respect of equity shares in a company orunits of equity oriented fund or of a businesstrust. A new scheme of taxation is proposed tobe introduced in respect of these long termcapital assets.

Currently, long-term capital gains arising fromtransfer of certain securities is exempt underSection 10(38) subject to the conditionsspecified therein. The exemption is available tothe following securities :i. Equity share in a companyii. Unit of an equity oriented fundiii. Unit of a business trust

The exemption is available subject to thecondition that transfer of such assets should bechargeable to Securities Transactions Tax(STT). In order to prevent abuse of exemptionby entering into sham transactions, theFinance Act, 2017 imposed an additionalcondition for claiming exemption in respect oflong-term capital gain arising from transfer ofequity shares. As per the amended provision,the exemption is available only if theacquisition of equity shares, which wereacquired on or after 1-10-2004, was alsochargeable to STT. However, this additionalcondition for claiming exemption is notapplicable in respect of certain acquisitionswhich may be notified for this purpose.

Accordingly, a Notification No. 43/2017 dated5-6-2017 was issued notifying the transactions

of acquisition which are eligible for the purposeof exemption under Section 10(38), though notchargeable to STT.

It is proposed to withdraw the exemption underclause 10(38) and to introduce new section112A in the Act to provide for taxation of theselong term capital assets.

a) The new section 112A provide that longterm capital gains arising from transfer ofa long term capital asset being an equityshare in a company or a unit of an equityoriented fund or a unit of a business trustshall be taxed at 10% of such capital gainsexceeding one lakh rupees.

b) This concessional rate of 10 per cent. willbe applicable to such long term capitalgains, if-i) In a case where long term capital asset

is in the nature of an equity share in acompany , securities transaction taxhas been paid on both acquisition andtransfer of such capital asset; and

ii) In a case where long term capital assetis in the nature of a unit of an equityoriented fund or a unit of a businesstrust, securities transaction tax hasbeen paid on transfer of such capitalasset.

c) It is further proposed to provide that in thecase of an individual or a Hindu undividedfamily, being a resident, where the totalincome as reduced by such long-termcapital gains is below the maximumamount which is not chargeable to income-tax, then, such long-term capital gainsshall be reduced by the amount by whichthe total income as so reduced falls short ofthe maximum amount which is notchargeable to income-tax.

d) It is also proposed to provide that capitalgains arising from a transactionundertaken on a recognised stockexchange located in any InternationalFinancial Services Centre and where theconsideration for such transaction isreceived or receivable in foreign currency,shall be eligible under this section withoutpayment of securities transaction tax.


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e) Further, sub-section (4) of the new section112A empowers the Central Governmentto specify by notification the nature ofacquisitions in respect of which therequirement of payment of securitiestransaction tax shall not apply in the caseof equity share in a company. Similarly,the requirement of payment of STT at thetime of transfer of long term capital asset,being a unit of equity oriented fund or aunit of business trust, shall not apply if thetransfer is undertaken on recognized stockexchange located in any InternationalFinancial Services Centre (IFSC) and theconsideration of such transfer is receivedor receivable in foreign currency.

f) The long term capital gains will becomputed without giving effect to the firstand second provisos to section 48, i.e.inflation indexation in respect of cost ofacquisitions and cost of improvement, ifany, and the benefit of computation ofcapital gains in foreign currency in thecase of a non-resident, will not be allowed.

g) The cost of acquisitions in respect of thelong term capital asset acquired by theassessee before the 1st day of February,2018, shall be deemed to be the higher of –

a) The actual cost of acquisition of such asset;and

b) The lower of –(I) The fair market value of such asset;

and(II) The full value of consideration

received or accruing as a result of thetransfer of the capital asset.

h) The benefit of deduction under chapterVIA shall be allowed from the gross totalincome as reduced by such capital gains.Similarly, the rebate under section 87Ashall be allowed from the income tax on thetotal income as reduced by tax payable onsuch capital gains.

i) It is also proposed to define the expression“equity oriented fund”, “fair market value”,“International Financial Services Centre”and “recognized stock exchange”.

The definition of “equity oriented fund” isproposed to be amended for the purpose ofSection 112A. As per the new definition, a fundwhich invests in another fund is also includedin it provided it satisfies the followingconditions –

i. Minimum 90% of the total proceeds of suchfund is invested in the units of anotherfund which is traded on a recognised stockexchange; and

ii. Such other fund also invests a minimum of90% of its total proceeds in the equityshares of domestic companies listed on arecognised stock exchange

Consequential amendments have also beenproposed in the Finance (No. 2) Act, 2004 inorder to bring sale of units of such fund withinthe chargeability of STT. Accordingly, sale ofunits of such fund would be chargeable to STTwith effect from 1st April, 2018.

The provisions of Section 2(42A) which definesa “short-term capital asset” still refer to the olddefinition of “equity oriented fund” as providedin Section 10(38). Therefore, units of such fundwhich invests in another fund are required tobe held for more than 36 months in order to bequalified as long-term capital assets unlesssuitable amendments have been made inSection 2(42A).

Section 115R provides for tax on incomedistributed by the mutual funds. Currently,distribution of income by equity oriented fundis not chargeable to distribution tax under thisSection. It is proposed to levy tax @10% onincome distributed by an equity oriented fundto any person with effect from 1st April, 2018.The justification for levy of such tax asexplained in the Memorandum is that it isnecessary to provide a level playing fieldbetween growth oriented funds and dividendpaying funds, in the wake of new capital gainstax regime for unit holders of equity orientedfunds. For this purpose, equity oriented fundwill have the same meaning assigned to it inthe new section 112A as explained above.Thus, it will also include the fund which investsin another fund and satisfies the otherconditions.


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The tax is required to be paid on the entireamount of the income distributed withoutreducing it by the amount of dividend whichthe fund might have received from the investeecompanies. Thus, it will result into a cascadingeffect of distribution tax.

These amendments will take effect from 1stApril, 2019 and will accordingly; apply inrelation to A.Y.2019-20 and subsequentassessment years.

Thus, in substance, the provisions of Section112A will apply to that long-term capital gainwhich was hitherto exempt under Section10(38). The condition of payment of STT onacquisition of equity shares is also retained inthe proposed provisions of Section 112A subjectto the exceptions to be notified for this purpose.It is clarified in FAQ that the same notification,which has been issued under Section 10(38), isproposed to be reiterated for the purposes ofnew provisions of Section 112A after itsenactment.

It is stated that exemption of long term capitalgains on shares and units of equity orientedfund is inherently biased againstmanufacturing and has encouraged diversionof investment in financial asset. It has led tosignificant erosion in the tax base resulting inrevenue loss.

Amendment to Section 10 (38) (Clause5(b)(iii))

Section 10(38) provides exemption to anyincome arising from the transfer of a long-termcapital asset in the form of equity shares in acompany or a unit of an equity oriented fund ora unit of a business trust where the transactionof sale of such equity share or unit is enteredinto on or after 1 October 2004 and suchtransaction is chargeable to securitiestransaction tax.

Clause 5(b) (iii) of the Finance Bill 2018 seeksto withdraw the above mentioned exemption.Thus, long term capital gain on sale of listedequity shares of a Company or a unit of anequity oriented fund or a unit of a businesstrust arising on or after 01-04-2018 shallbecome taxable.

Section 10(38) expressly provides that thecondition of payment of STT on acquisition isapplicable only in respect of those equity shareswhich have been acquired on or after 1stOctober, 2004 i.e., the date on which STT cameinto force. Section 112A does not provide soexpressly. However, it is but obvious that thiscondition should be read with the relevantprovisions of Chapter VII of the Finance (No. 2)Act, 2004 which came into force from 1stOctober, 2004 only. If STT itself was notapplicable prior to 1st October, 2004, thecondition of payment of STT on acquisitioncannot be made applicable to equity sharesacquired before 1st October, 2004. This view isfurther fortified from the clarifications issuedvide FAQ which clearly provides that STT isrequired to be paid even at the time ofacquisition in case of equity shares acquired onor after 1-10-2004.

If the provisions of Section 112A are notapplicable due to violation of any conditionspecified therein, then the long-term capitalgains will be computed in accordance with thenormal provisions and will be taxed inaccordance with the provisions of Section 112.For instance, the listed equity shares havebeen sold off-market (without paying STT). Insuch case, the assessee may apply Proviso toSection 112 and compute the tax @10% of long-term capital gains without applying secondproviso to Section 48 i.e., indexation. However,the assessee will not be able to compute the costof acquisition in the manner provided inSection 112A in respect of assets acquiredbefore 1st February, 2018.

Major part of the exempt Long term CapitalGains accrue to corporates and LLPs. This hasalso created a bias against manufacturing,leading to more business surpluses beinginvested in financial assets. The return oninvestment in equity is already quite attractiveeven without tax exemption. There is thereforea strong case for bringing long term capitalgains from listed equities in the tax net.

This amendment will apply to sale made on orafter 1 April 2019 and will accordingly apply inrelation to the Assessment Year 2019-20 andsubsequent assessment years.


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Conversion of Inventory into CapitalAsset or such inventory is treated asCapital Assets (Clause 9)

Presently section 45(2) of the Income Tax Act,provides that any capital gain arising fromconversion of Capital Asset into Stock intrade shall be chargeable to tax. However,conversely if any stock in trade is convertedinto capital asset or treated as Capital assetthen such conversion treatment is notchargeable to tax.

Sub clause (via) is proposed to be inserted insection 28 to provide that Fair Market Value(as determined in manner to be prescribed) ofinventory as on date of conversion would bechargeable to tax under head Profits and Gainsfrom Business and Profession.

Section 2(24) ;-It is proposed to insert new clause (xiia) inSection 2(24) - "Income". It is proposed toinclude in the definition of Income "the fairmarket value of inventory as on the date onwhich it is converted into or treated as capitalassets."

Section 2 (42A): Short Term Capital AssetIt is proposed to insert new clause inexplanation 1 of Section 2(42A) - “short termcapital assets”. It is proposed that indetermining the period of holding in case ofconversion of inventory into or treated ascapital assets shall be reckoned from the date ofits conversion or treatment.

Section 49 - Cost with reference to certainmodes of acquisition (Clause 18)

It is also proposed to provide that the fairmarket value of the inventory on the date ofconversion or treatment determined in theprescribed manner, shall be deemed to be thefull value of the consideration received oraccruing as a result of such conversion ortreatment;

Accordingly it is proposed to amend the section49 by inserting new sub clause (9) so as toprovide that where the capital gain arises fromthe transfer of a capital asset, referred to inclause (via) of section 28 (i.e. conversion ofstock in trade into capital asset), the cost of

acquisition of such asset shall be deemed to bethe fair market value which has been takeninto account for the purposes of section 28 (via)for calculating profits and gains of business.

The intention is to tax the “profits or gains”from the conversion of inventory into capitalasset, the Finance Bill, unfortunately, statesthat the fair market value will be taxed asbusiness profits. Similarly, section 2(24) (xiia)also states that the fair market value of theinventory would be considered as income.However when one goes to section 45(2) whichstates that the profits or gains arising out ofconversion of a capital asset into stock-in-tradeis taxable as capital gains. Similar wording hasnot be considered while drafting section 28(via)and section 2(24) (xiia). Further Section 45(2)taxes capital gains when the converted asset isfinally sold i.e. in the year of transfer, and notin the year in which the capital asset isconverted into stock-in-trade. To the contrary,the amended section 28 seems to tax theconversion of inventory into capital asset, inthe year of conversion, rather than the year inwhich the asset is sold. Taxation at the time ofconversion which is notional in nature, isbound to cause undue financial hardship to anassessee. Without realization of any income,the amendment postulates that tax has to bepaid on such estimated income.

A conversion of inventory into capital asset orvice versa, is actually a transaction withoneself. It is the basic testament of tax law thatone cannot earn income from oneself. Hence,the point of taxation should have been whenthe asset is ultimately alienated / sold/discarded.

Presently Section 45 provides for chargeabilityof Capital Gain arising from conversion ofcapital asset into stock in trade, in the year inwhich such converted asset is sold. However,there is no tax for conversion of inventory intocapital assets. It has been stated that in orderto provide symmetrical treatment anddiscourage the practice of deferring the taxpayment by converting inventory into capitalasset, it is proposed to provide that any profit orgain arising from conversion of inventory intocapital asset or its treatment of capital asset,would be taxable as business income.


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The above amendment will take effect from 1stApril, 2019 and will accordingly apply inrelation to AY 2019-20 and subsequent years.

Section 50C - Special provision for fullvalue of consideration in certain cases(Clause 19)

Section 50C deals with provision forconsidering stamp duty value on transfer of acapital asset being Land or building or both.

The said section provides that in case oftransfer of a capital asset being land orbuilding or both, the value adopted or assessedor assessable by the stamp valuation authorityfor the purpose of payment of stamp duty inrespect of such transfer shall be taken as thefull value of consideration for the purposes ofcomputation of Capital gains in the hands ofthe seller, if the same is more than the fullvalue of consideration.

It is proposed to insert third proviso to sub-section (1) of the said section so as to providethat where the value adopted or assessed orassessable by the stamp valuation authoritydoes not exceed one hundred and five per cent.of the consideration received or accruing as aresult of the transfer, the consideration soreceived or accruing as a result of the transfershall, for the purposes of section 48, be deemedto be the full value of the consideration. Itprovides that no adjustments shall be made ina case where the variation between stamp dutyvalue and the sale consideration is not morethan five percent of the sale consideration.

However it is important to note that, by a literalinterpretation, this 5% is not an exemptionlimit i.e. if the difference amounts to 6% ofactual sale consideration then whole of 6%shall be added up in order to determine the fairvalue of consideration and not just 1% (6% -5%). It should be noted that the proposedamendment does not cover sub-section (2) ofsection 43CA which provides for reference tothe Valuation Officer. In other words, thebenefit of 5% variation with the actualconsideration is not proposed to be allowed withreference to the value adopted by the ValuationOfficer on a reference under sub-section (2) ofsection 43CA.

Presently no variation between stamp dutyvalue and actual consideration is allowedunder the Act. It has been pointed out that thisvariation can occur in respect of similarproperties in the same area because of a varietyof factors, including shape of the plot orlocation. In order to minimize hardship in caseof genuine transactions in the real estatesector, the amendment has been proposed.

The Pune bench of Tribunal in the case ofRahul Constructions vs DCIT (Pune) 38 DTR19(2010) and the Mumbai Bench of ITAT in thecase of M/s Krishna Enterprises vs Addl CITITA No 5402/ Mum/2014- has held that positionof section 50C do not apply where thedifference between Stamp Duty Value andConsideration is upto 10%.

This amendment will take effect from 1st April,2019 and will, accordingly, apply in relation tothe assessment year 2019-2020 andsubsequent years.

Similar AmendmentsSimilar amendments are proposed in section43CA and section 56(2)(x) by clause 14 andclause 21 of the Finance Bill respectively

Section 54EC - Capital gain not to becharged on investment in certain bonds(Clause 20)

Section 54EC provides for exemption in respectof capital gains on investment in certain bonds.

A. The section provides that capital gainarising from the transfer of a long-termcapital asset, invested in the long-termspecified asset at any time within a periodof six months after the date of suchtransfer, shall not be charged to taxsubject to certain conditions specified inthe said section. Presently, exemption isprovided in respect of any long term capitalasset.

B. Clause (ba) of the Explanation to thesection 54EC defines expression “long-term specified asset” for making anyinvestment under the said section on orafter the 1st day of April, 2007, to meanany bond, redeemable after three yearsand issued on or after the 1st day of April,


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2007 by the National Highways Authorityof India or by the Rural ElectrificationCorporation Limited; or any other bondnotified by the Central Government in thisbehalf.

Proposed AmendmentsA. It is proposed to amend the said section so

as to provide that capital gain arising fromthe transfer of a long-term capital asset,being land or building or both, invested inthe long-term specified asset at any timewithin a period of six months after the dateof such transfer, the capital gain shall notbe charged to tax subject to certainconditions specified in the said section. Itis proposed to restrict the exemption onlyin respect of capital asset being land orbuilding or both.

B. It is proposed to provide that investment inspecified bonds made on or after 1st April,2018 will be redeemable after 5 years asagainst 3 years provided in respect of suchbonds issued before 1st April, 2018. Pleasenote that proposed section provides forinvestments made on or after 1st April,2018. Thus, even if the capital gain hasaccrued on or before 31st March, 2018 butinvestment in specified bonds is made on orafter 1st April, 2018, then the bonds willbe redeemable after 5 years.

The Finance Bill now seeks to limit the benefitof exemption to only transfer of land orbuilding or both, instead of exempting longterm capital gains arising out of any asset.Further, the term for investment of 3 years,has now increased to 5 years. Term ‘Land &building’ may not include leasehold rights,rights of a buyer of flat under construction,tenancy rights, development rights etc.The amendment is proposed to restrict the scopeof section only to capital gains arising from longterm capital asset being land or building orboth and to make available funds at thedisposal of eligible bond issuing company for alonger period.

Effective DateBoth these amendments will take effect from1st April, 2019 and will, accordingly, apply inrelation to the assessment year 2019-2020 andsubsequent years.

Section 36: Other deductions (Clause 10)and Section 40A: Expenses or paymentsnot deductible in certain circumstances(Clause 11)

Notification No. 87/2016 [S.O. 3079(E)], dated2nd September, 2016 notified the ten ICDSapplicable from A.Y. 2017-18 onwards.

The Chamber of Tax Consultants haschallenged the above notification no 87 beforethe Delhi High Court.

Vide Circular No. 10 of 2017 dated 23rd March2017, the CBDT issued clarifications in theform of 25 Frequently Asked Questions (FAQs)purporting by way of answers thereto toprovide clarity for better implementation of theICDS.

However, Question No. 2 in the said Circularand an answer thereto is significant and readsthus:

Question 2: Certain ICDS provisions areinconsistent with the judicial precedents.Whether these judicial precedents wouldprevail over ICDS?Ans: The ICDS have been notified after duedeliberations and after examining judicialviews for bringing certainty on the issuescovered by it. Certain judicial pronouncementswere pronounced in the absence ofauthoritative guidance on these issues underthe Act for computing income under the head“Profits and gains from business or Profession”or income from other sources. Since certainty isnow provided by notifying ICDS under Section145 (2), the provisions of ICDS shall beapplicable to the transactional issues dealttherein in relation to assessment year 2017-18and subsequent assessment years. (Emphasissupplied)

From the above clarification, it is unmistakablethat the ICDS is intended to prevail overjudicial precedents which may be to thecontrary. The question that arises is whetherthis is permissible in exercise of delegatedlegislative power?

Delhi High Court in Chamber of TaxConsultants Vs Union of India 252 Taxmann77 (2018), in order to preserve constitutionality


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of ICDS, reads down Sec.145 (2) of Income taxAct, restricts power of Central Govt. to notifyICDS so as to ensure that they do not overridebinding judicial precedents or provisions of theAct. Strikes down ICDS I, II, III, VI, VII, PartA of ICDS VIII as ultra vires of the Act/contrary to settled position of law as laid downby Supreme Court;

HC, relying on a catena of Apex Courtdecisions, observes that - That a tax cannot belevied by way of an executive action is a settledposition. Tax cannot also be levied by way ofadministrative instructions as observed by theSupreme Court.

HC finds merit in the contention of thePetitioners that ICDS notified under Section145 (2) of the Act has the effect of modifyingthe basis for computation of taxable income asrecognized by the Act and as interpreted by theSupreme Court;

HC further rules that - where the notified ASor as in this case the ICDS, seeks to alter thesystem of accounting, or according accountingor taxing treatment to a particular transaction,then it will require the legislature to step in toamend the Act to incorporate such change;

HC holds that the power under Sec. 145 (2)cannot permit changing the basic principles ofaccounting recognized in various provisions ofIncome tax Act, unless amendments are carriedout in the Act

Thus Delhi High court has held that the ICDSwhich overrule the provisions of the Act, therules there under and the judicial precedentsapplicable thereto, are struck down as ultravires the Act.

Delhi high Court firstly, held that the essentiallegislative functions cannot be delegated andin context of income-tax law, following wereheld to be essential legislative function:

a) Changing the basic principles and methodof accounting that have been recognized invarious provisions of the Act forcomputation of income or according taxtreatment to a particular transaction.

b) To make a validation law to override

judicial precedents and that too by actuallyremoving the defect pointed out by suchprecedent.

The High Court after considering the judgmentof the Apex Court in case of Tuticorin AlkaliChemicals and Fertilizers Limited vs. CIT(1997) 227 ITR 172, held that AccountingStandards has hardly any role to play in theprinciples governing determination of income,which has been well settled by the provisions ofthe Act as well as by judicial precedents.

The Court, in order to preserve theConstitutional validity of the ICDS, read downsection 145(2) of the Act as amended, to restrictpower of the Central Government to notifyICDS that do not seek to override bindingjudicial precedents or provisions of the Act orRules. Thus, it was held by the Court that theCentral Government, under delegatedlegislation, cannot override any judicialprecedents and also cannot amend or alter anybasic principles governing the computation ofincome. After laying down the above importantprinciples the Court gave specific findings quaeach ICDS and struck down some part ofNotification No. 87/2017 as unconstitutional.Corresponding amendments in Form 3CD andclarifications in the Circular were also struckdown. In so far as the above fundamentalprinciples are concerned, there is noamendment proposed in the Act. However,there are several amendments proposed in theBill to do away with the findings of the Court inrespect of specific ICDS.

To overcome the above judicial pronouncementwhich has laid doubt on the legitimacy of theICDS, it is proposed to bring amendmentretrospectively w.e.f AY 2017-18 to ensure andregularize the compliance with the notifiedICDS.

Each of them has been discussed hereunder:

Allowability of Marked to Market (MTM)losses in accordance with ICDS:

Clause 10 seeks to insert clause (xviii) insection 36(1) which provides that MTM loss orother expected loss as computed in accordancewith ICDS shall be allowed as a deduction.


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Besides, sub section 13 in section 40A has beeninserted to specifically provide that nodeductions or allowance shall be allowed inrespect of any marked to market loss or otherexpected losses except as allowable u/s36(1)(xviii).

Thus, MTM losses computed in accordance withICDS shall only be allowed and no other MTMlosses, other than as permissible by ICDS, shallbe allowed.

Further, ICDS I - Income Computation andDisclosure Standard 1 on Accounting Policies,Para 4(ii) of the said ICDS 1, clarifies thatMTM loss or an expected loss shall not berecognized unless the recognition of such loss isin accordance with the provision of any otherIncome Computation and Disclosure standard.

Some of the instances of MTM lossespermitted under other ICDS:

ICDS 2:Inventory shall be valued at cost or NetRealisable Value , whichever is lower. (Para 3- ICDS 2)

ICDS 6:In respect of monetary item, exchangedifference arising on settlement thereon or onconversion shall be recognized as income orexpense in the previous year. (para 5(1))(For non monetary item, exchange differencearising on conversion thereof at the last day ofthe year shall not be recognized as income orexpense) Exchange difference on a forwardcontract shall be recognized as income orexpense in the previous year in which theexchange rate changes. (para 8) (Forwardexchange contract should not be intended fortrading or speculation purpose and it shall notapply to a contract that is entered into hedgethe foreign currency risk of firm commitment orhighly probable forecast transactions)

MTM forex loss on monetary items (includingforwards and options for hedging purposes)

ICDS 8Securities held as stock in trade to be valued atCost or NRV which ever is lower. (Inventoryvaluation loss on securities)

ICDS 10Provision for liabilities on reasonable certaintybasis.

Section 43:Definitions of certain termsrelevant to income from profits and gainsof business or profession. (Clause 12)

Section 43(5) of the Income Tax Act definesSpeculative Transaction. Proviso to sub section(5) of section 43 carves out an exception thatcertain transaction would be of a non-speculative nature even though the contractsare settled otherwise than by actual delivery ontransfer of commodity or scrips. Clause (e) tosection 43(5) provides that trading incommodity derivatives carried out inrecognized association will not be considered asspeculative nature, provided such transactionis chargeable to Commodity Transaction Tax.(C.T.T.)

A new proviso has been proposed to be insertedbefore Explanation 1 to provide thattransaction in respect of agriculturalcommodity derivatives which is not chargeableto C.T.T. will still be treated as non-speculativetransaction.

Commodity Transaction Tax was introducedvide Finance Act 2013 to bring transactionsrelating to non agricultural commodityderivatives under the tax net, while keepingout agricultural commodity derivatives exemptfrom commodity transaction tax. Since noC.T.T. is paid on agricultural commodityderivatives, the same were considered to bespeculative transaction. In view of the proposedamendment, transactions in trading ofagricultural commodity derivatives evenwithout C.T.T. would be eligible to claim thebenefit of sec 43(5)(e) and accordingly it will betreated as non speculative transaction.

The above amendment will take effect from 1stApril 2019 and will accordingly apply inrelation to the AY 2019-20 and subsequentyears.

Section 43AA: Taxation of Foreignexchange fluctuation (Clause 13)

Section 43A of the Income Tax Act, providesthat any exchange gain or loss at the time of


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making the payment in respect of assetsacquired from a country outside India, theamount by which the liability is so increased orreduced shall be added to or the case may bededucted from the actual cost of the assets.

Clause 13 seeks to insert a new section 43AA toprovide that (subject to provisions of section43A) any gain or loss arising on account ofeffects of change in foreign exchange rate inrespect of specified foreign currencytransaction shall be treated as income or losswhich shall be computed in the mannerprovided in the ICDS.

Specified foreign currency transactionsincluding those relating to:

Monetary Recognised as income oritems expense in the previous year

Non monetary Exchange difference shall notitem be recognised as income

or expense in that year

Translation of Losses and gains arising byfinancial valuation of monetary assetsstatements of and liabilities of the foreignforeign operations could be recognisedoperations as income or expenses.

Forward Exchange difference on aexchange forward contract shall becontracts recognized as income or

expense in the previous yearin which the exchangerate changes.

(However, Forward contractshould not be entered fortrading or speculationpurpose. Besides, it should alsonot be entered into to hedgethe foreign currency risk offirm commitment or highlyprobable forecast transaction)

Foreign Balance in FCTR account ascurrency on April 2016 may betranslation recognized as income or lossreserves to therelevant AY 2017-18

(Q. 16 of circular 10 of 2017).

Section 43CB: Computation of Incomefrom construction and service contracts(Clause 15)

Clause 15 seeks to insert a new section 43CB.The said section provides that profit arisingfrom construction contract or a contract forproviding services shall be determined onthe basis of percentage of completionmethod except for certain servicecontract (where the duration of such servicecontract is not more than 90 days or a contractinvolving indeterminate number of acts over aspecific period of time which shall bedetermined on the basis of straight linemethod), in accordance with ICDS notified u/s.145 (2) of the Act.

For the purpose of Percentage CompletionMethod, Project Completion Method or Straightline Method, as the case may be, the contractrevenue shall include retention money but thecontract cost shall not be reduced by incidentalincome in the nature of interest, dividend, orcapital gain.

The above proposed amendment seeks tooverrule the following decisions wherein it washeld that retention money does not accrue to anassessee until and unless the defect liabilityperiod is over and the engineer in chargecertify that no liability is attached to theassessee.(i) CIT v. Simplex Concrete Piles India (P) Ltd

(1988) 179 ITR 8(ii) CIT v. P & C Constructions (P) Ltd (2009)

318 ITR 113(iii) Amarshiv Construction (P) Ltd v. DCIT

(2014) 367 ITR 659 and(iv) DIT v. Ballast Nedam International (2013)

355 ITR 300.

Besides, this proposed section further providesthat contract cost shall not be reduced byincidental income in the nature of interest,dividend and capital gain. This is contrary tothe decision of the Supreme Court in CIT v/sBokaro Steel Limited (1999) 236 ITR 315,wherein it was held that if an Assessee receivesany amounts which are inextricably linkedwith the process of setting up of its plant and


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machinery, such receipts would go to reducethe cost of its assets.

Section 145A & 145B – Method ofAccounting in Certain Cases & Taxabilityof certain Income (Clause 45)

Section 145A provides for valuation ofpurchases, sales and inventory for the purposeof determining the income chargeable underthe head “Profits and gains of business orprofession. It further provides interest incomeon compensation or enhanced compensationshall be deemed to be income of the year inwhich it is received.

Section 145A of the Act is entirely substitutedto provide that, for the purpose of determiningthe income chargeable under the head “Profitsand gains of business or profession,—

(a) The valuation of inventory shall be madeat lower of actual cost or net realizablevalue computed in the manner provided inIncome Computation and DisclosureStandards (ICDS) notified under (2) ofsection 145.

(b) The valuation of purchase and sale ofgoods or services and of inventory shall beadjusted to include the amount of any tax,duty, cess or fee actually paid or incurredby the assessee to bring the goods orservices to the place of its location andcondition as on the date of valuation.

(c) Inventory being securities not listed, orlisted but not quoted, on a recognisedstock exchange, shall be valued at actualcost initially recognised in the mannerprovided in Income Computation andDisclosure Standards (ICDS) notifiedunder (2) of section 145.

(d) Inventory being listed securities, shall bevalued at lower of actual cost or netrealisable value in the manner providedin Income Computation and DisclosureStandards (ICDS) notified under (2) ofsection 145 and for this purpose thecomparison of actual cost and netrealisable value shall be done category-wise.

At present , section 145 of the Act empowers theCentral Government to notify IncomeComputation and Disclosure Standards(ICDS). In pursuance the Central Governmenthas notified ten such standards effective from1st April 2017 relating to Assessment year2017-18.These are applicable to all assesses(other than an individual or a Hindu undividedfamily who are not subject to tax audit undersection 44AB of the said Act) for the purposes ofcomputation of income chargeable to income-tax under the head “Profits and gains ofbusiness or profession” or “Income from othersources”. In order to bring certainty in thewake of recent judicial pronouncements on theissue of applicability of ICDS rendered in thecase of Chamber Of Tax consultants v UOI[2018] 252 Taxman 77 (Delhi)(HC)

The provision is applicable retrospectively from1st April 2017.

INSERTION OF NEW SECTION 145B –TAXABILITY OF CERTAIN INCOMENew section 145B is inserted in the Act toprovide that

a) Interest received by an assessee oncompensation or on enhancedcompensation, shall be deemed to be theincome of the year in which it is received.

b) The claim for escalation of price in acontract or export incentives shall bedeemed to be the income of the previousyear in which reasonable certainty of itsrealisation is achieved.

c) Income referred to in sub-clause (xviii) ofclause (24) of section 2 i.e. subsidy, grant,cash incentive etc shall be deemed to be theincome of the previous year in which it isreceived, if not charged to income tax forany earlier previous year.

The reason for inserting this provision is sameas amendment of Section 145A The provision isapplicable retrospectively from 1st April 2017.

Reasoning for the proposed Amendmentin relation to notified IncomeComputation and Disclosure Standards:

Delhi High court in Chamber of Tax


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Consultants v/s Union of India has raised thedoubts on the legitimacy of the notified ICDS.It was clarified that large number of taxpayershave already complied with provisions of ICDsfor computing income for AY 2017-18. In orderto regularise the compliance with notified ICDsby a large number of taxpayers.

It is proposed to bring the amendmentretrospectively w.e.f. AY 2017-18 andsubsequent assessment years.

Section 44AE: Special provision forcomputing profits and gains of business ofplying, hiring or leasing goods carriages(Clause 16)

Section 44AE of the Income Tax Act providesthat an assessee who owns not more than 10goods carriages and who is engaged in thebusiness of plying, hiring or leasing such goodscarriages, profits or gains from each goodscarriage shall be and equal to Rs. 7,500 permonth during which the goods carriage isowned by the assessee. The present section doesnot distinguish between large capacities / sizegoods carrier vis a vis small capacity goodscarrier.

It has been now proposed to substitute sub-section (2) to sec. 44AE to provide that forheavy vehicles (weight of which exceeds 12metric tons), the profits or gains shall be Rs.1,000 per ton of gross vehicle weight for everymonth or part of the month during whichheavy goods vehicle is owned by the assessee oran amount actually earned from such vehicle,whichever is higher. For other than heavygoods vehicle, existing provisions will continue,i.e. Rs.7,500/- per month for such goodsvehicles.

The legislative intent of introducing theprovisions of section 44AE was to give benefitsto the small transporter in order to reduce theircompliance burden. However the currentpresumptive income scheme is applicableuniformly to all classes of goods carriersirrespective of their tonnage capacity. Henceeven though the profit margin of the largecapacity goods carriages are higher than thesmall capacity goods carriages, the taxconsequences are similar which is against theprinciple of tax equity.

The above amendment will take effect from 1stApril 2019 and will accordingly apply inrelation to the AY 2019-20 and subsequentyears.

Section 80AC: Deduction not to be allowedunless return furnished (Clause 23)The said section provides that where, incomputing the total income of an assessee ofthe previous year, any deduction admissibleunder sections 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, shall be allowed to him only if hefurnishes a return of his income for suchassessment year on or before the due datespecified for filing return of income u/s. 139 (1).

It is proposed to substitute above section so asto provide that in computing the total income ofan assessee of the previous year, any deductionadmissible under Chapter VIA: heading “C.—Deductions in respect of certain incomes” shallbe allowed only if the return is filed within thedue date specified for filing return of incomeu/s. 139 (1).

Thus deductions u/s. 80HH, 80HHA, 80HHB,80HHBA, 80HHC, 80HHD, 80HHE, 80HHF,80-I, 80-IA, 80-IAB, 80-IAC, 80-IB, 80-IBA,80-IC, 80-ID, 80-IE, 80JJA, 80JJA, 80LA, 80-O, 80P, 80Q, 80QQA, 80QQB, 80R, 80RR,80RRA or 80RRB will not be allowed if returnof income is not filed within specified due dateu/s. 139(1).

The burden of filing return of income in time iscast upon all assesses claiming deductions u/s.80H to 80RRBL in respect of specified incomes,which was earlier limited to assessee’s claimingdeductions u/s. 80-IA, 80-IAB, 80-IB, 80-IC,80-ID or 80-IE only.

These amendments are proposed to be madeeffective from the 1st April, 2018 and willaccordingly apply in relation to the assessmentyear 2018-19 and subsequent years.

Section 80IAC: Special provision inrespect of specified business (Clause 26)

Section 80-IAC, inter alia, provides thatdeduction shall be available to an eligible start-up for 3 consecutive assessment years out of 7yrs at the option of the assessee, if-


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(a) It is incorporated on or after the01.04.2016 but before 01.04.2019;

(b) The total turnover of its business does notexceed Rs. 25 Crores in any of the previousyears beginning on or after the 01.04.16and ending on the 31.03.21; and

(c) It is engaged in the eligible business whichinvolves innovation, development,deployment or commercialization of newproducts, processes or services driven bytechnology or intellectual property.

It is proposed to make following changes inabove provisions:

(i) The benefit would also be available to startups incorporated on or after 01.04.19 butbefore 01.04.21;

(ii) The requirement of the turnover notexceeding Rs 25 Crores would apply to 7previous years commencing from the yearin which it is incorporated;

(iii) The definition of eligible business has beenexpanded that benefit would be availableif it is engaged in innovation, developmentor improvement of products or processes orservices, or a scalable business model witha high potential of employment generationor wealth creation.

In order to improve the effectiveness of thescheme for promoting start-ups in India.


Section 80JJAA: Deduction in respect ofemployment of new employees (Clause 27)

At present additional deduction @ 30% isallowed for 3 years, in addition to normaldeduction of 100%, in respect of emolumentspaid to eligible new employees.

Eligible new employees must have beenemployed for a minimum period of 240 daysduring the year. However, this is relaxed to

150 days in the case of manufacturing ofapparel.

It is proposed that relaxation of minimumemployment of 150 days in a year will also beavailable in the case of business ofmanufacturing of footwear or leather products.

Further, it is also proposed to rationalize bygranting benefit of above deduction for a newemployee who is employed for less than theminimum period during the first year butcontinues to remain employed for a period of240 days or 150 days, as the case may be, in theimmediately succeeding year.

Under the existing provision, In case whereemployees were employed in the organizationin later part of the year, the duration ofemployment may be less than 240 days or 150days and hence, the assessee was not eligiblefor the deduction in that year. Further, in thesucceeding year also, no deduction wasavailable for such employees as they were notnewly employed in the succeeding year.

Hence, it is proposed to insert a proviso to theeffect that if new employees are employed forless than the minimum period during the firstyear of employment but continue to remainemployed for the minimum period insubsequent year, such employees will bedeemed to have been employed in thesucceeding year. This will entitle the assesseeto claim deduction of 30% of such employee costincurred in such succeeding year as adeduction for three years beginning with suchsucceeding year. It has been also proposed toreduce the minimum employment period of 240days to 150 days in case of ‘Footwear’ and‘Leather’ industry.


Section 115BA - Tax on income of certaindomestic companies (Clause 33)

Section 115BA of the Act provides that the totalincome of a newly set up domestic companyengaged in business of manufacture or


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production of any article or thing and researchin relation thereto, or distribution of sucharticle or thing manufactured or produced byit, shall, at its option, be taxed at the rate of 25per cent subject to conditions specified therein.This benefit is available from assessment year2017-18.

It is proposed to amend section 115BA so as toclarify that the provisions of section 115BA isrestricted to the income from the business ofmanufacturing, production, research ordistribution referred to therein; and incomewhich are at present taxed at a scheduler ratewill continue to be so taxed.

There are certain incomes which are subject toa scheduler tax at a rate which is lower orhigher than 25 per cent. Consequently taxpayers have been subjected to unintendedhardship or unwarranted relief. Accordingly,this amendment is proposed.

The amendment will take effect retrospectivelyfrom the 1st April, 2017 and will, accordingly,apply in relation to the assessment year 2017-18 and subsequent years.

Section 115JB: Special provision forpayment of tax by certain companies(Clause 35)

Section 115JB of the Act, provides for levy of aMinimum Alternate Tax (MAT) on the “bookprofits” of a company. In computing the bookprofit, it provides, inter alia, for a deduction inrespect of the amount of loss brought forwardor unabsorbed depreciation, whichever is lessas per books of account. Consequently, wherethe loss brought forward or unabsorbeddepreciation is Nil, no deduction is allowed.

Proposed Amendments1. It is proposed to amend Explanation 1 to

the said section so as to provide that in caseof a company, against whom anapplication for corporate insolvencyresolution process has been admitted bythe Adjudicating Authority under section 7or section 9 or section 10 of the Insolvencyand Bankruptcy Code, 2016, theaggregate amount of unabsorbeddepreciation and loss brought forward

shall be allowed to be reduced from thebook profit and the loss shall not includedepreciation.

2. A clarificatory amendment is also proposedin section 115JB of the Act to provide thatthe provisions of section 115JB of the Actshall not be applicable and shall be deemednever to have been applicable to anassessee, being a foreign company, if- itstotal income comprises solely of profits andgains from business referred to in section44B or section 44BB or section 44BBA orsection 44BBB and such income has beenoffered to tax at the rates specified in thesaid sections.

Where the loss brought forward or unabsorbeddepreciation was Nil, no deduction of the loss ordepreciation was allowed for computing BookProfits. This non-deduction was a barrier torehabilitating companies seeking insolvencyresolution. Consequent to amendment, acompany whose application has been admittedfor insolvency, would henceforth be entitled toreduce the loss brought forward (excludingunabsorbed depreciation) and unabsorbeddepreciation for the purposes of computingbook profit under section 115JB.

The first amendment will take effect from from1st April, 2018 and will, accordingly, apply inrelation to the assessment year 2018-19 andsubsequent assessment years.

The second clarificatory amendment will takeeffect, retrospectively from 1st April, 2001 andwill, accordingly, apply in relation to theassessment year 2001-02 and subsequentassessment years.

Section 139A - Permanent accountnumber (Clause 42)

Sub-section (1) of section 139A, inter alia,provides that every person specified thereinand who has not been allotted a permanentaccount number shall apply to the AssessingOfficer for allotment of a permanent accountnumber.

It is proposed to provide that every person, notbeing an individual, which enters into a


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financial transaction of an amountaggregating to two lakh fifty thousand rupeesor more in a financial year shall apply to theAssessing Officer for allotment of a permanentaccount number.

Clause 42 of the Finance Bill further providesthat the managing director, director, partner,trustee, author, founder, karta, chief executiveofficer, principal officer or office bearer of theperson referred to in clause (v), or any personcompetent to act on behalf of the personreferred to in clause (v), shall also apply to theAssessing Officer for the allotment ofpermanent account number.

In order to use PAN as Unique Entity Number(UEN) for non-individual entities, it is proposedthat every person, not being an individual,which enters into a financial transaction of anamount aggregating to two lakh and fiftythousand rupees or more in a financial yearshall be required to apply to the AssessingOfficer for allotment of PAN.

In order to link the financial transactions withthe natural persons, it is also proposed that themanaging director, director, partner, trustee,author, founder, karta, chief executive officer,principal officer or office bearer or any personcompetent to act on behalf of such entities shallalso apply to the Assessing Officer for allotmentof PAN. This amendment will take effect from1st April, 2018.

Section 143 – Assessment (Clause 44)Clause (a) of sub-section (1) of the said sectionprovides that at the time of processing of returnof income made under section 139, or inresponse to a notice under sub-section (1) ofsection 142, the total income or loss shall becomputed after making the adjustmentsspecified in clauses (i) to (vi) therein.

Sub-clause (vi) of the said clause provides foradjustment in respect of addition of incomeappearing in Form 26AS or Form 16A or Form16 which has not been included in computingthe total income in the return.

It is proposed to insert a new proviso to the saidclause so as to provide that no adjustmentunder sub-clause (vi) of the said clause shall be

made in respect of any return furnished for theassessment year commencing on or after the 1stday of April, 2018.

With a view to restrict the scope of adjustments,the new proviso provides that no adjustmentunder sub-clause (vi) of the said clause shall bemade in respect of any return furnished on orafter the assessment year commencing on thefirst day of April, 2018.

This amendment will take effect from 1st April,2018.

Insertion of Sub-section 3A, 3B and 3Cunder Section 143 : Assessment (Clause44)

It is proposed to insert sub-sections (3A), (3B)and (3C) in the said section so as to, inter alia,provide for a scheme, by notification in theOfficial Gazette, for the purpose of makingassessment of total income or loss of theassessee under sub-section (3).

For the purpose of improving effectiveness oftax administration, it is proposed to prescribe anew scheme for the purpose of makingassessments so as to impart greatertransparency and accountability, byeliminating the interface between theAssessing Officer and the assessee, optimalutilization of the resources, and introduction ofteam-based assessment.

Therefore, it is proposed to amend the section143, by inserting a new sub-section (3A), aftersub-section (3), enabling the CentralGovernment to prescribe the aforementionednew scheme for scrutiny assessments, by wayof notification in the Official Gazette.

It is further proposed to insert sub-section (3B)in the said section, enabling the CentralGovernment to direct, by notification in theOfficial Gazette, that any of the provisions ofthis Act relating to assessment shall not apply,or shall apply with such exceptions,modifications and adaptations as may bespecified therein. However, no such directionshall be issued after the 31st March 2020.

It is also proposed to insert sub-section (3C) in


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the said section, to provide that everynotification issued under the sub-section (3A)and sub-section (3B), shall be laid before eachHouse of Parliament, as soon as may be. Thisamendment will take effect from 1st April,2018.

Section 194A : Interest other than“Interest on securities” (Clause 47)

It provides that the income tax is to be deducted@ 10% on interest other than income (by way ofinterest on securities), where the amount ofsuch income does not exceed;

(a) Ten thousand rupees, where the payer isbanking company or

(b) Where the payer is co-operative societyengaged in carrying on the business ofbanking, or

(c) On any deposit with post office under anyscheme framed by CentralGovernment, or

(d) Five thousand rupees in any other case.

It is proposed to amend to raise the thresholdfor deduction of tax at source on interestincome for Senior Citizens from Rs. 10,000/- toRs 50,000/- by insertion after the secondproviso of sub-section (3) in clause (i) of theprovision of sub-clause (a), sub-clause (b), andsub-clause (c) only, to provide relief to seniorcitizens

Accordingly, for Senior Citizens, threshold fordeduction of tax at source on interest incomeother than by way of interest on securities isRupees Fifty Thousand;

(a) Where the payer is banking company or

(b) Where the payer is co-operative societyengaged in carrying on the business ofbanking or

(c) On any deposit with post office under anyscheme framed by Central Government

(d) Five thousand rupees in any other case

This amendment will take effect from 1st April,2018.

Section 276CC : Failure to furnish returnsof income (Clause 52)

Sub-clause (b) of clause (ii) of the proviso to thesaid section provides that a person shall not beproceeded against under the said section forany assessment year commencing on or afterthe 1st day of April, 1975, if the tax payable byhim on the total income determined on regularassessment as reduced by the advance tax, ifany, paid and any tax deducted at source, doesnot exceed three thousand rupees.

Clause 52 of the Bill seeks to amend theprovisions of the said sub-clause (b) so as toprovide that the conditions specified thereinshall not be applicable in respect of a company.

To prevent misuse of the said proviso by shellcompanies or by companies holding Benamiproperties, so as to provide that the said sub-clause shall not apply in respect of a company.

The amendment in clause 52 will take effectfrom 1st April, 2018.

Section 10 : Incomes not included in totalincome (Clause 5(b)(i))

Amendment to Section 10 (12A)

Sec 10(12A) provides exemption to Employeesto the extent of 40% of the Pension payable atthe time of closure or opting out from NationalPension System Trust.

Clause 5(b)(i) of Finance Bill 2018 seeks toamend the provision by extending the benefitof exemption under Section 10(12A) to allassesses in place of only Employees.

Deduction under Section 80CCD was extendedfrom Employees to All Assessees with effectfrom AY 2015-16. Clause 5(b)(i) of the FinanceBill seeks to bring the exemption provision u/s10(12A) in line with the deduction u/s 80CCD.

This amendment will take effect from 1st April,2019 and will, accordingly, apply in relation tothe Assessment Year 2019-20 and subsequentassessment years.


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Tax rates

There is no changes in tax rates or tax slabs in case of non-corporate taxpayers. There is no changein rate of surcharge. The marginal relief will remain the same.

The Tax rate for small and medium- sized domestic companies having annual turnover or grossreceipts up to Rs 250 crore in FY 2016-17 have been reduced to 25%

For the other domestic companies, 30% tax rate continues unless the company opts for section 115BAand satisfies the conditions of that section.

A new cess named “Health and Education Cess” @ 4% is introduced and the existing Education Cess(2%) and Secondary and Higher Education Cess (1%) have been discontinued.

There is no change in the rebate under section 87A.

Tax rate on long term capital gains arising on transfer of long term equity share etc. as specified undersection 112A will be 10% plus applicable surcharge and cess. Similar rate is applicable to ForeignInstitutional Investors as provided in the amended sec.115AD.

There is no change in rate of Minimum Alternate Tax (MAT) as compared to last year in case ofcompanies.

Alternative Minimum Tax (AMT) in case of a unit located in an International Financial Services centrehas been reduced from 18.5% to 9% plus applicable surcharge and cess.

Income distributed to unit holders of equity oriented mutual fund will attract distribution tax asprovided in section 115R at the rate of 10% plus applicable surcharge and cess.

Thus, the effective maximum marginal tax rates (including surcharge and cess) for AY 2019-20 will beas under:

Person Total income (Rs)Up to Above Above Above

Rs 50 lakh Rs 50 lakh 1 crore & Rs 10 croreUp to Up to

Rs 1 crore Rs 10 crore

Individuals, HUF etc. 31.2% 34.32% 35.88.% 35.88%

Firms 31.2% 31.2% 34.944% 34.944%

Domestic CompaniesWith total turnover/gross receiptsin FY 2016-17 not exceedingRs 250 crore 26% 26% 27.82% 29.12%

Other Domestic Companies 31.2% 31.2% 33.384% 34.944%

Foreign Company 41.6% 41.6% 42.432% 43.68%


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IMPACT OF FISCALDEFICIT ON THE ECONOMY

Contributed by :CA Mukesh Dedhia(a member of the association)

he can be reached [email protected]

No macro economic issue has generated morecontroversy than the impact of government deficitsand debt upon the economy. What are the variouseconomic problems created by large deficits ? Whatis the relationship between private saving andpublic saving ? At one extreme, we must avoid thecustomary practice of assuming that public deficitsare bad and on the other hand, we must recognizethe genuine problems associated with excessivegovernment deficits.

Governments use budgets to control and recordtheir expected financial transactions. It isprepared every year and it shows the plannedexpenditure of various government programs(education, defence, welfare schemes, etc) and theestimated revenues from various taxes (individual,corporate and indirect taxes). One would expect abalanced budget where the revenues are equal tothe expenditure or even a surplus budget wherethe revenues are more than the expenditure,however what we usually find is a deficit budgetwhere the expenditure is more than the revenues.

When the government runs a deficit, they need toborrow from the public, corporates, institutions likebanks, insurance companies, pension funds, etc.and also foreign governments and corporates. Theaggregate government borrowing is calledgovernment debt or even as public debt(because ultimately this debt will have to be paidby current or future citizens of the country by wayof taxes). This debt will keep on rising if thegovernment runs a deficit year after year. Whatwill be worse is if the government has to borroweven to pay for the interest on that aggregateborrowings or debt.

Every government will try to have a fiscal policyto guide them while preparing a budget. By fiscalpolicy, we mean the process of shaping taxationand public expenditure in order to smoothen theswings of business cycle and to contribute to themaintenance of a growing, high employmenteconomy and free from high or volatile inflation.So, in a slowing economy simply raise spending or

lower taxes and if inflation threatens do theopposite. Despite this we still have business cyclesas this works more in theory than in practice.

The second major instrument of macroeconomicpolicy is monetary policy which is controlled bythe Central bank of the country and it manages thecountry’s money, credit and banking systems. Itmanages the monetary policy by controlling theinterest rates and the money supply. They couldincrease the interest rates and control the moneysupply in case of higher inflation and reduceinterest rates and increase money supply to spurthe growth in a slowing economy. They alsomanage the foreign reserves of the country and thevalue of the nation’s currency against major globalcurrencies.

Fiscal policies dealing with taxes and publicexpenditure, in cooperation with monetary policies, have as their goals rapid economic growth withhigh employment and stable prices.

Principal weapons of discretionary fiscal policy arepublic works, other capital programs, public-employment projects and changes in tax rates.Public works and capital programs take a long timeto plan and implement and hence many times donot help to counteract recessions but, on thecontrary, could start getting implemented wheninflationary trends are back and it adds further toinflation and many a times with cost over runs. Atthe other extreme from highly capital-intensive,long duration public-works projects are public-employment projects like MGNREGA. Theseprograms are designed to hire unemployed forshort periods. These projects can be started andphased out very quickly, however critics find themwasteful as the projects many a times are ofsecondary importance. A third approach todiscretionary fiscal policy is to cut income-tax ratestemporarily in order to keep disposable incomesfrom falling and to prevent the economy slidinginto recession. Varying tax rates can be used tostimulate or restrain the economy. However, if


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people know that this tax cuts are temporary thenconsumers will restrain their consumption and thispolicy tool might not have the impact it envisaged.

These shortcomings of fiscal policy stand in sharpcontrast to the potential of discretionary monetarypolicy. Monetary policy can be changed quickly andhas been seen to be highly effective in expandingor contracting the economy in the short term.Whereas fiscal policy can be used to correct thenation’s investment-savings balance and perhapsto counter any deep recessions or great inflationsthat cannot be handled by monetary policy alone.

From 1776 to 1929 there was no change in the waythe public finances were being handled. AdamSmith’s principles of balanced budget werenormally followed. However during the greatdepression of the 1930s, John Maynard Keynesspearheaded a revolution in economic thinking,challenging the ideas of neoclassical economics thatheld that free markets would, in the short tomedium term, automatically provide fullemployment , as long as workers were flexible intheir wage demands. He instead argued thataggregate demand determined the overall level ofeconomic activity and that inadequate aggregatedemand could lead to prolonged periods of highunemployment. Keynes advocated the use of fiscaland monetary policies to mitigate the adverseeffects of economic recessions and depressions.Thus higher deficits were used to combat recessionwhile lower deficits or even surpluses helped tocurb inflation. Thus, a balancing act was seen overan entire business cycle and not year after year.

But what if the needs of stabilization policy drivedeficits and government debt ever upward ? Shouldwe be as concerned about the deficits and debt asour grandparents were ? There are no simpleanswers to these questions. To find answers, wemust consider the impacts of the deficits and debtsupon the economy :a) Are the deficits recession-induced or policy-

induced?b) Do deficits "crowd out" investment or do they

encourage it ?c) What is the true economic burden of the

government debt, and how does the debt affecteconomic growth ?

Let us first try to understand the differencebetween a Structural deficit and a Cyclicaldeficit . The structural deficit is activelydetermined by discretionary policies such as settingtax rates , social security benefits, capitalprograms, size of the defense budget, etc. Whereasthe cyclical deficit is passively determined by thestate of the business cycle, that is, by the extent towhich national income and output are high or low.Now if the actual deficit increases in a given year,one might be tempted to say that the government istrying to stimulate the economy. But thisassessment could be dead wrong. Indeed, a higherdeficit stemming from lower tax rates or capitalprogram spending would tend to increaseaggregate demand. On the other hand, a higherbudget deficit arising from an economic downturnwould not be a sign of fiscal expansion; it wouldmark an economic downturn. The structuralbudget is one of the most important analytical toolsof macroeconomics. It allows us to separate changesin policy from the effects of the business cycle ,enabling us to make a better diagnosis of wherefiscal policy is leading the economy.

The absolute size of the government debt is alwaysfrighteningly large. From an economic perspective, it is important to compare the size of the debt toGDP and to measure the amount of GDP that mustgo to cover the interest payments. If discretionaryspending has achieved its purpose to increaseoverall output and hence the GDP, then the ratio ofdebt to GDP and interest payments to GDP could infact go downin spite of absolute increase in thepublic debt.

We further need to understand and analyze theimpact of fiscal deficit both in the short term andthe long term as it would behave differently. Theshort-run impact of budget deficit upon theeconomy is known as "crowding out". In the long-run, the government debt varies with differentfiscal and monetary paths, and output tendstoward its potential . It will have its impact oncapital formation and consumption of futuregenerations and is also known as the “burden ofthe debt”.

The Crowding -out controversy : Business leadersoften argue that government spending on public-works projects or social programs for the poor and


26

elderly simply crowds out private investments ofhigher yields. That means lesser money is availablefor private projects because of governmentborrowings. Also higher government borrowing/spending tends to raise interest rates and henceprivate capex programs may slow down. Thus someof the induced increase in GDP may be offset asthe higher structural deficit crowds out investment.

Crowding-out from Structural deficit vsCyclical deficit : Crowding out is primarilyconcerned with the effects of structural rather thancyclical deficits. If the deficit rises because of arecession ( cyclical deficit) the logic of crowding outsimply does not apply. Because a recession causes adecline in the demand for money and leads to lowerinterest rates. The relationship between deficits,interest rates, and investment during recessionsshows why there is no automatic crowding out ofinvestment by higher deficits.

Crowding-in : At the other extreme is a situationwhere, in the short run, investment is actuallyencouraged (or “crowded in”) by larger deficits.Investments can actually be boosted due to higherGDP due to Structural deficits. This can happenwhen output is stimulated by fiscal policies whenproductive capacities are underutilized. Whenproduction capacities start getting utilized a needfor further investments to augment the capacitiesarise. This can happen when the monetary policy issupportive (increase in money supply and notallowing interest rates to rise).

Such are the theories. Which of these extremes iscloser to actual experience? History provides noclear-cut answer. One would expect higherpersonal savings when tax rates are reduced,disposable incomes rise and there are higher post-tax real rates on savings. But it has not happened.In USA its also observed that with higherstructural deficits and higher interest rates,currency has appreciated and hence importsincreased and exports decreased. This reduced thenet exports part of the GDP and hence the overallimpact of structural deficit was contained. So nowwhat can we say about crowding out ? One canlargely argue that monetary policy and financialmarket reactions tend largely to offset the impact ofgovernment spending. It is important to note,however, that the extent of the crowding out

depends on the stance of the Central Bank; anaggressive anti-inflation view would produce morecrowding out than a complacent andaccommodative central bank. Because the linkbetween deficits and investment is so complex –involving savings behavior, the foreign sector,financial markets, and monitory policy – it isdifficult to predict which route crowding out willfollow in the next fiscal expansion.

Long-run impact of government debt : Will thehigh public debt lower future living standards foran average citizen ? This question raises threespecific issues : the difficulties of servicing a largeexternal debt, the inefficiencies of levying taxes topay interest on the debt, and the diminishedeconomic growth that occurs when a large debtdisplaces capital accumulation.

The first distinction to be made is betweenExternal vs. Internal Debt: An internal debt isowed by a nation to its own citizens. Many arguethat it poses no burden because “we owe it all toourselves”. An external debt is owed by a nation toforeigners. This debt does involve a net subtractionfrom the resources available to citizens of thatcountry. In the 1980s and 1990s, many nationsexperienced severe economic hardships after theyincurred large external debts especially the shortterm debt. They were forced to export more thanthey imported to run trade surpluses in order to“service their external debts”, that is to pay theinterest and principal on their past borrowings.The debt-service burden on an external debtrepresents a reduction in the consumptionpossibilities of a nation, thus pushing up inflationand reducing currency value. This in turn furtherpushes up inflation due to imported inflation(compulsory imports like fuel becoming more costlydue to a weakened currency). In the late 1980s, theUnited States joined the list of debtor countries. Itslarge external deficit (large negative net exports)turned USA from a creditor nation to a debtornation. In 1990 USA’s total debt increased from22% (in 1980) to 40% of GNP and interest chargeswent up from 1.9% ( in 1980 ) to 3.9% of GNP.Since then USA has probably not remained thefinancial force it used to be. Sub-prime crisis whicherupted in 2007 in USA further dented itsreputation with many banks and large institutionslike a 150 years old AAA rated Lehman brothersand AIG going down the belly. USA must


27

eventually generate positive net exports or run atrade surplus to pay the interest on its foreignloans. It will have to export many billions of dollars’worth of aircraft, arms and ammunitions, food andother goods than it imports. Its clearly seen fromPresident Trump’s current trade policies which areinward looking rather than a global open tradepolicy.

Efficiency losses from taxation: If the governmentincrease taxes to pay interest on its internal debt itwill have distorting effects on incentives that areinescapably present in the case of any taxes. Peoplemight work less or save less; either of theseoutcomes must be reckoned a distortion ofefficiency and well-being.

Displacement of capital: Perhaps the most seriousconsequence of a large public debt is that itdisplaces capital from the nation’s stock of wealth.As a result, the pace of economic growth slows andfuture living standards will decline. As thegovernment debt grows, people and institutionslike bank, insurance and pension companies willaccumulate government debt instead of privatecapital and the nation’s private capital stock will bedisplaced by public debt. In an open economy, thecountry may borrow abroad rather than reduce itsdomestic capital stock. The exact amount ofdisplacement will depend on the conditions ofproduction and on the savings behavior of domestichouseholds and foreigners.

Debt and growth :If we consider all the effects of government debt onthe economy, we see that a large public debt can bedetrimental to long-run economic growth. As thedebt accumulates over time, more and more capitalis displaced. As taxes are raised to pay interest onthe debt, inefficiencies further lower output. Also,an increase in external debt lowers national incomeand raises the fraction of national output that hasto be set aside for servicing the external debt.Taking all the effects together, output andconsumption will grow more slowly than theywould had there been no large government debtand deficit.

A new discipline: Countries across the globe havewitnessed heavy public debt and deficits and arefacing the consequences. Hence in many countriesnow we are seeing constitutional amendments to

balance the budget and contain the growth indeficits and debt. In India we have (FRBM) THEFISCAL RESPONSIBILITY AND BUDGETMANAGEMENT ACT, 2003 . An Act to provide forthe responsibility of the Central Government toensure inter-generational equity in fiscalmanagement and long-term macro-economicstability by achieving sufficient revenue surplusand removing fiscal impediments in the effectiveconduct of monetary policy and prudential debtmanagement consistent with fiscal sustainabilitythrough limits on the Central Governmentborrowings, debt and deficits, greater transparencyin fiscal operations of the Central Government andconducting fiscal policy in a medium-termframework and for matters connected therewith orincidental thereto.

We can hardly doubt that high fiscal deficits havehelped in bringing back growth and reducingunemployment and poverty. Because much of thedebt is flowing abroad to finance a large tradedeficit, the nation will face rising interestpayments, debt burdens and taxes to service thedebt. At some point, the trade deficit will have toturn to a surplus as we export our futureproduction to pay for current consumption. It ispossible that the transition from today’s low-savingeconomy to a high-saving economy may beaccompanied by reductions in living standardsfor future generation of consumers.

Our Association's mouthpiece "News &Views" has readership circulation of morethan 1400 Chartered Accountant andStudent members. We have now startedaccepting advertisement for staff vacancy.In case you have any vacancy at youroffice or at any of your client for qualifiedChartered Accountants or Students or anyadministrative job, we will publish yourrequirement in the Journal. This will be atvery nominal cost of Rs. 1,500 for quarterpage advertisement per issue. We will betaking advertisement on first cum first servebasis.

Kindly contact CVO CA Office on+91-22-24105987 for more details.


28

1. UPDATE ONGST

Compiled by :

NOTIFICATIONS - CENTRAL TAX : Notification No. 11/2018-CENTRAL TAX-

DATED 2nd February, 2018.Vide Notification No. 74/2017-CENTRAL TAX-DATED 29th December 2017, Government hasnotified 01/02/2018 to be the date from which Eway bill was required to be uploaded on system.Vide this notification, Government has revokednotification no.74/2017-Central tax.

CIRCULARS : CGST : Circular No. 31/05/2018 – GST-dated 9th

February, 2018.The Central Board of Excise and Customs hasassigned Proper officers for the purpose ofimplementation of provisions under sections 73and 74 of the Central Goods and Services Tax Act,2017 and under the Integrated Goods and ServicesTax Act, 2017. The provisions deals withdetermination of tax not paid or short paid orerroneously refunded or input tax credit wronglyavailed or utilized.

Circular No. 32/06/2018-GST-dated 12thFebruary, 2018.The Circular clarifies GST implications for Hostelaccommodation by Trust, the fee/amount, penaltypaid while registering complaints to ConsumerDisputes Redressal Commission office and itssubordinate offices, the services of elephant orcamel ride, rickshaw ride and boat ride, rentalservices of self-propelled access equipment,Consultancy charges paid by hospital to seniordoctors, technicians, retention money by hospital,food supplied to patient, etc.

Circular No. 33/07/2018-GST-dated 23rdFebruary, 2018.The Circular restricts utilization of disputedCENVAT Credit credited in electronic credit ledgerduring transition. Disputed CENVAT credit meansCENVAT credit where a show cause notice wasissued under rule 14 of the CENVAT Credit Rules,2004, which has been adjudicated and where inthe last adjudication order or the last order-in-

CA Bharat K. GosarCA Nitin D. Kenia

appeal, as it existed on 1st July, 2017, it was heldthat such CENVAT credit is not admissible. Suchrestriction will be in force till the order-in-originalor the last order-in-appeal, as the case may be,holding that disputed credit as inadmissible is inexistence. Similar restrictions is imposed wherecredit is taken u/s 140(1)(i) of CGST Act but it isrestricted u/s 17(5) of CGST Act. If the saiddisputed credit is utilised, then it will be recoveredfrom the tax payer, with interest and penalty.

Circular No.34/08/2018-GST-dt 1st March,2018The Circular in details clarifies GST implicationsfor activity of bus body building, retreading oftyres, Priority Sector Lending Certificates (PSLCs),the activities carried by DISCOMS againstrecovery of charges from consumers under StateElectricity Act, the guarantee provided by StateGovernment to state owned companies againstguarantee commission.

LEGAL UPDATES /DECISIONS

FORM IVStatement about ownership and other particulars about news paper CVO CA’sNews & Views to be published in first issue year after the last day of February

1 Place of Publication : CVO Chartered and CostAccountants Association304, Jasmine Apartment,Dadasaheb Phalke Road,Dadar (E), Mumbai – 14

2 Periodicity : Monthly

3 Printer’s Name : Real Print ServicesNationality : IndianAddress : 24/26, Mint Road,

4/45,Patel Mantion,Near GPO Fort, Mumbai – 1

4 Publisher’s Name : Manoj C. ShahNationality : IndianAddress : 101, Bhaveshwar Complex,

Vidyavihar (W), Mumbai – 86

5 Editor’s Name : Ramesh ChhedaNationality : IndianAddress : 160, Room No.7, 3rd Floor,

D. N. Road, Fort, Mumbai – 1

6 Name and Address of individuals : CVO Chartered and Costwho own the newspaper and Accountants Associationpartners or shareholders 304, Jasmine Apartment,holding more than one Dadasaheb Phalke Road,percent of the total capital Dadar (E), Mumbai – 14

I Manoj C. Shah, hereby declare that the particulars given above are true tothe best of my knowledge and belief.

Sd/-Date : 09.03.2018 Signature of Publisher


29

2 FEMA UPDATES

Compiled by :CA. Manoj Shah

Gist of some Compounding Orders passed by Reserve Bank of India

No. Subject Matter Contraventions Compounded1. ECB related – FEMA Company is engaged in providing educational services

Notification No. 3 rendered through non-technical colleges, schools, universitiesand other institutions raised loans in foreign currency fromits foreign equity holder in 2004 to 2013.

Since company was engaged in providing educationalservices, at the time of raising loans it was not eligible to raiseloan which led to contravention.

It further utilised ECB proceeds as working capital forexpansion of business which was a non-permissible end use atthe time of raising loan.

It contravened condition that drawdown shall be made onlyafter obtaining Loan Registration Number.

The borrower company also did not adhere to reportingrequirements as prescribed by RBI.

2. ECB related – FEMA Company is engaged in business of generation and supply ofNotification No. 3 electricity and other allied activities raised interest free loan

from one of its non-resident directors in 2007.

Company raised loan from persons other than entities eligibleto give loans, was not an eligible lender.

Company utilised the ECB proceeds for non permissible enduses.

It contravened condition that drawdown shall be made onlyafter obtaining Loan Registration Number.

The borrower company did not adhere to reportingrequirements as prescribed by RBI.

3. Overseas Direct Investment Company set up WOS in Switzerland in 2012. However, therelated – FEMA investment was made through bank other than designatedNotification No. 120 AD bank of the company which was in contravention of

regulation 6(2) of FEMA Notification No. 120. As per saidregulation, all transactions related to investment in one WOShave to be routed through the same branch of the same bank.

4. Downstream Investment – Company is a WOS of Mauritius company. It madeFEMA Notification No.20 downstream investment in another Indian company.

Company was of view that the activities for the downstreamcompany falls under Miscellaneous Service category andtherefore any direct or indirect foreign investment was underautomatic route.


30

However, Government of India, Ministry of Finance, FIPB,DEA observed that activities of downstream company fellunder ‘Other Financial Services’ and any downstreaminvestment therefore required prior approval which was notobtained by the Company.

5. Liberalised Remittance Scheme Individual purchased shares of Indian company from foreignand Section 3(b) and 10(6) company using funds remitted under LRS held in residentof FEMA 1999 individual’s overseas account.

This resulted in contravention of Section 3(b) and Section10(6) of FEMA 1999.

The individual had purchased shares from funds held in hisoverseas accounts. These funds were initially remitted byindividual under LRS with declaration that they will be usedfor investment in shares overseas.

There was contravention of Section 3(b) with reference to useof foreign exchange acquired by a person other thanauthorised person for purposes which is not permissible underthe Act.

6. Branch Office – FEMA The Branch Office (BO) of a foreign company had ceased toNotification No. 22 carry its activities in 2005. However, still it kept temporary

term deposits from 2013 to 2015 with Indian bank. AD can allow branch office to keep funds in term deposits out

of surplus funds for period not exceeding 6 months based onundertaking of BO that it will be used for business in Indiawithin 3 months of maturity of such deposit.

However, keeping deposit after such BO ceases to carry anyactivity was contravention of Regulation 6(i) of FEMANotification 22.

FOR ATTENTION OF MEMBERS/SUBSCRIBERS Members are requested to come forward and contribute their

articles in CVO CA’s News & Views, the mouthpiece of ourAssociation. Best Article contributed by new comer shall beawarded with a special prize.

While sending Articles for News & Views, please confirmthat the same are not published/not given for publishingelsewhere. No correspondence shall be made in respectof Articles not accepted for publication; nor will they besent back.

The views and opinion expressed or implied in the Newsand Views are those of the authors and do not necessarilyreflects those of the association. The opinion expressedherein should not be construed as legal or professionaladvice. Neither the Association nor the authors/contributors are responsible in any manner for anypersonal or professional liability arising due to thedecisions taken by readers on the basis of these views.The association is also not in any way responsible for theresult of any action taken on the basis of the advertisementpublished in the journal.

This is “YOUR” magazine. Please give your feedback/suggestions etc. Kindly intimate change of your address bysending the necessary intimation to the Associations’Office.

Non receipt of News & Views may be intimated to :CA Harsh Dedhia - 9892444121Email Id - [email protected]

Rates for Advertisements in CVO CA’s News & Views (perinsertion) are as under:

Inside Full Page (Single color printing) Rs. 8,000/-

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(More than one insertion at time entitles for discount)Classified Advertisements rate Rs. 400/- for 100 words.

CVO CA's News & View Subscription charges for 1 year Rs.500 & 3 years Rs. 1200 for Non members of theassociation.

Members are requested to register themselves to CVO CAYahoo Group by sending E-mail to “[email protected]” to quickly receive thelatest updates and communication from the Association.

c.v.o. ca’s news & views vol. 21 no. 9 / march 2018 · c.v.o. ca’s news & views vol. 21...

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