Valuation u/r 11UA (2)(b) of
Income-tax Rules, 1962 (‘the Rules’) by a Chartered Accountant removed
The valuation rules specified
under Rule 11U, Rule 11UA, Rule 11UAA and Rule 11UB for various provisions
under the Income-tax Act, 1961 (‘the Act’) cover valuation options in case of various
assets including equity shares and other securities. These rules specify the
methodology to be adopted at the time of arriving at fair market value in
different scenarios. Among the various provisions of the Act, the provision u/s
56(2)(viib) states that where a company other than a company in which public
are substantially interested, issue shares at more than fair market value to a
resident person, then the differential value between such issue price and fair
market value will be considered as income under such provision of the Act.
The methodology to be adopted for
the purpose of valuation under this section has been specifically stated under
rule 11UA(2) separately for equity shares and shares other than equity shares.
Sub clause (b) under this sub-rule states that the fair market value of
unquoted shares and securities other than equity shares in a company which are
not listed in any recognized stock exchange shall be estimated to be price it
would fetch if sold in the open market on the valuation date and the assessee
may obtain a report from a merchant banker or a Chartered Accountant in respect
of which such valuation. This has been amended vide notification dated 24 May
2018 which states as follows:
‘2. In the Income-tax Rules, 1962 (hereinafter referred to as the
principal rules), in rule 11U, clause (a) shall be omitted.
3. In the principal rules, in rule 11UA, in sub-rule (2), in clause
(b), the words “or an accountant” shall be omitted.’
The word accountant has been
omitted under Rule 11U and Rule 11UA(2)(b) which implies that for the purpose
of section 56(2)(viib), in case of shares other than equity shares, the
valuation certified by only merchant bankers will be valid.
Thin
Capitalisation Rules under the Income-tax provisions (section 94B of Income-tax
Act, 1961)
‘Thin Capitalisation’ is a
situation where an entity is financed at a relatively high level of debt
compared to equity. Some multinational companies engage in aggressive tax
planning techniques such as placing higher levels of third party debt in high
tax countries, using intragroup loans to generate interest deductions in excess
of their actual third party interest expense, using third party or intragroup
financing to fund the generation of tax exempt income.
In order to curb such structuring
by the multinational group Companies having their presence through
subsidiaries/ associate companies or permanent establishments in India, the
Finance Act 2017 introduced a new section 94B under the Income-tax Act, 1961
(‘the Act’), in line with the recommendations of OECD BEPS Action Plan 4, from
the FY 2017-18, to provide that interest expenses claimed by an entity to its
associated enterprises shall be restricted to:
– 30% of its earnings
before interest, taxes, depreciation and amortization (EBITDA) (or)
– Interest paid or payable
to associated enterprise
whichever is less
The provision shall be applicable
to an Indian company, or a permanent establishment of a foreign company being
the borrower who pays interest in respect of any form of debt issued to a
non-resident or to a permanent establishment of a non-resident and who is an
‘associated enterprise’ of the borrower. Further, the debt shall be deemed to be
treated as issued by an associated enterprise where it provides an implicit or
explicit guarantee to the lender or deposits a corresponding and matching
amount of funds with the lender.
Relaxations Provided
1. A threshold limit of
interest expenditure of INR 1 crore (INR 10 million) is provided to carve-out
entities which have a low level of interest expense on the borrowings from
their non-resident associated enterprises.
2. Further, to reduce the
impact of earnings volatility on the ability of an entity to deduct interest
expense, the interest expense which is disallowed can be carried forward up to
8 immediately succeeding tax years.
3. Moreover, taxpayers
engaged in the business of banking or insurance are excluded from the scope of
this provision keeping in view their specific sector-related features.
In addition to the above, the
provisions of GAAR will have to be simultaneously considered at the time of
considering the transfer pricing implications on the transactions.
Frequently asked questions (FAQs)
What
is the definition of EBITDA?
EBITDA has not been
defined in section or in the memorandum, however considering the language of
the section, it can be interpreted to mean accounting EBITDA.
Whether
transfer pricing adjustment and other disallowances will be considered for the
purpose of determination of EBITDA u/s 94B(2)? i.e. Tax EBITDA v/s. Accounting
EBITDA?
The language of the section reads as
‘earnings before interest, taxes, depreciation and amortisation’ thereby giving
room for adjusting only interest, taxes, depreciation and amortisation to the
net earning and ruling out other disallowances, if any. However, if the
transfer pricing adjustment has been made and if it falls within the purview of
secondary adjustment (i.e. more than 1 crore) which will be accounted as
receivable from the associated enterprise (u/s 92CE of the Income-tax Act,
1961), then the same may be considered for the purpose of calculating EBITDA.
Whether
interest paid to non-resident AE only to be considered for the purpose of
disallowance under section 94B?
As mentioned in the below email, the
provision shall be applicable to an Indian company, or a permanent
establishment of a foreign company being the borrower who pays interest in
respect of any form of debt issued to a non-resident or to a permanent
establishment of a non-resident and who is an ‘associated enterprise’ of the
borrower. Further, the debt shall be deemed to be treated as
issued by an associated enterprise where it provides an implicit or explicit
guarantee to the lender or deposits a corresponding and matching amount of
funds with the lender. Therefore, the limit of INR 10 million of
borrowing cost mentioned under provision of section 94B will apply to the
borrowings of the nature mentioned above.
Would
hedging or swap cost be considered for this purpose or would the interest paid
to AE be considered for this purpose?
As per section 94B of the Act, ‘… where
an Indian company, or a permanent establishment of a foreign company in India,
being the borrower, incurs any expenditure by way of interest or of
similar nature exceeding one crore rupees which is deductible in
computing income chargeable under the head “profit and gains of business or
profession” in respect of any debt issued by a non-resident,
being an associated enterprise of such borrower, the interest shall not
be deductible in computation of income under the said head to the
extent that it arises from excess interest, as specified in sub section (2)’
Sub-section (2) states that ‘For the
purpose of sub-section (1), the excess interest shall mean an amount of total
interest paid or payable in excess of thirty per cent of earnings before
interest, taxes, depreciation and amortisation of the borrower in the previous
year or interest paid or payable to associated enterprises for that previous
year, whichever is less.’
Therefore, a consolidated reading of the
above would mean that for the purpose of calculation of initial limit of INR 10
million for the trigger of this section 94B, interest or sums of similar
nature in respect of any debt issued is considered, whereas for the purpose
of quantifying the amount of disallowance, only interest in excess of 30
percent of EBITDA is disallowed/ adjusted. However, it is pertinent to note
that the word interest has been separately defined in the Act u/s 2(28B) as ‘”interest”
means interest payable in any manner in respect of any moneys borrowed or debt
incurred (including a deposit, claim or other similar right or obligation) and
includes any service fee or other charge in respect of the moneys borrowed or
debt incurred or in respect of any credit facility which has not been
utilised”’
To conclude, even if one excludes the swap cost and other charges
while interpreting section 94B of the Act, it will be included in accordance
with the definition of interest under the Act.
Back in 2006, when I entered in
CA profession, we were thought that CAs are expected to be perfect in their
accounting skills. Accounting was considered to be all about accounting
standards, be it IGAAP or IFRS, and about the disclosure requirements along with
Balance Sheet, Profit & Loss A/c and Cash Flow Statement. While we were
trying to cope up with the international standards during all these years,
there were drastic changes globally peoples approach in carrying out their
business. Ideally, CAs role is directly related to the business environment of
the nation. Which is to say that since the CAs are accountable for the
businesses they audit or advice, they are also expected to understand the
environment in which these businesses operate.
While the business owners were
adapting to the new technologies and the latest modes of carrying out their
business which included digitisation of the transactions, payments,
communication, etc. CA curriculum in India have always been kept traditional.
All these years since the independence, where the business developments have
happened in a phased manner, in the last 5 years there has been complete change
in the way business is looked at in India. People have been shifted to digital
means to transact, be it marketing, be it sales, be it payments, etc. Having
understood this, one has to realise the requirement for a complete shift in the
curriculum of CA and the approach which should be deliberated for the CA
students, from the old school to the Digital Era.
Why is this so important?
Ofcourse, this would be the first question which anyone would get in their mind
while starting this topic. We have always seen in Indian Bollywood movies that
the cops arrive at the scene after the incidence is occurred and the mischief
has happened. This culture remains throughout all verticals in India, including
the professional environment. There was a time when the E-commerce entered the
Indian economy, it was a welcome move where trading became of products was
moved from showrooms to cellphones, ticket booking was moved from windows to
mobile apps, etc. The Indian systems have, after deliberating on the subject
have lately comforted themselves with the way E-commerce works, excluding the bureaucrats,
who are still struggling to understanding the modus operandi, due to lack of
training, again its because of their curriculum which still remains old school.
And now they have seen the shift again, a new technology has stepped in the
economy, BLOCKCHAIN. Blockchain, having its own advantages, has its own way of
functioning. Professionals in each field which include accountancy, technology,
marketing, designing, and so on, need to understand this technology. One of its
most critical and important changes which has even impacted the economy which
functions with blockchain technology was introduction of CRYPTOCURRENCY.
Having understood that the
cryptos have a huge impact on the economy of any nation, it is also important
that the nation should understand the pros and corns both of this technology.
The
Finance Act, 2016 introduced Equalisation Levy with effect from 01-06-2016.This
levy is charged at the rate of 6% from the consideration paid or payable to a
non-resident person for the online advertisement services. The Finance Bill,
2020, as passed by the Lok Sabha, has extended the scope of Equalisation Levy
to cover within its scope the consideration received or receivable for
e-commerce supply or services made or facilitated by an e-commerce operator.
Equalization
Levy
When to be charged?
From
01-04-2020, the equalisation levy shall be charged at the rate of 2%
from the consideration received or receivable by an e-commerce operator from
e-commerce supply of goods or services made or provided or facilitated by it to
the following persons:
A
person who is resident in India;
non-resident
in ‘specified circumstances
who buys such
goods or services or both using internet protocol address located in India.
E-commerce operator means a non-resident who
owns, operates or manages digital or electronic facility or platform for online
sale of goods or online provision of services or both
E-commerce supply or
services
means:
Online sale of goods
owned by the e-commerce operator;
Online provision of
services provided by the e-commerce operator;
Online sale of goods or
provision of services or both facilitated by the e-commerce operator; or
Any combination of above
activities
specified circumstances means
sale of
advertisement, which targets a customer, who is resident in India or a customer
who accesses the advertisement though internet protocol address located in
India; and
sale of data,
collected from a person who is resident in India or from a person who uses
internet protocol address located in India.
When
not to be charged?
where the
e-commerce operator has a permanent establishment in India and such e-commerce
supply or services is effectively connected with such permanent establishment
where the equalisation levy is leviable on online
advertisement and related activities
sales, turnover or gross receipts, of the
e-commerce operator from the e-commerce supply or services made or provided or
facilitated is less than INR 20 million during the financial year.
Who
needs to comply with such compliance?
The equalization levy is
to be paid by the non-resident e-commerce operator quarterly within the
following due dates:
Date of ending of the quarter
Due date
30 June
7 July
30 September
7 October
31 December
7 January
31 March
31 March
Consequences
of non-compliance?
Interest: Delayed payment carries simple interest at the rate
of 1 percent for every month or part of a month
Penalty: Failure to pay equalisation levy attracts penalty
equal to the amount of equalisation levy
Whether
income tax benefits available?
The Income-tax law has been amended
to provide for exemption arising from any income arising from any e-commerce
supply or services made or provided or facilitated, and chargeable to
equalization levy as explained above.
What
would be the impact?
Previously, the government had
introduced the concept of “Significant Economic Benefits” in the definition of
“Business Connection” which specifically aimed towards getting the non-resident
entities operating in India through digital means under the tax regime.
However, the treaties benefitted the respective non-residents as there was no
such provision under the PE articles of the treaties. Having said that, the
Government of India has now introduced this concept of taxing such e-commerce
companies under equalization levy which will have a significant impact on the
non-resident supplying goods and services digitally. This is so because the
definition of ‘e-commerce operators’ and ‘e-commerce supply or services’ are
very wide in scope. Therefore, taxpayers may now need to evaluate various
scenarios to understand the implication under this. For instance, even where
the parent company provides any IT services to its subsidiary company, such
provisions will have to be looked into from applicability perspective.
More importantly, it is also
pertinent to note that supply of goods or service from one non-resident to
other also may attract these provisions (where the is some nexus with India).
It is important to note that the provisions of equalization levy are not part
of Income-tax and therefore benefit of treaty may not be available in relation
to such levy. Additional guidance on this subject is awaited from the
Government on these provisions.
Understanding
the Taxation and other related issues related to Bitcoins (Cryptocurrencies)
Crypto Currencies are decentralized virtual or digital currencies
which are neither issued by any Central Bank nor are backed up by any
Government. These currencies are quite popular because they provide secure and
anonymous way of remittance of money and entering into a transaction. These
currencies are acceptable as a mode of payment by some entities. The Honourable
Finance Minister in the Budget speech of 2018 mentioned that Cryptocurrency is
not legal tender in India but the government will explore its underlying
technology, called blockchain, to usher in the digital economy, finance
minister Arun Jaitley said on Thursday while presenting Union Budget 2018. The
government will take measures to eliminate use of crypto-assets in financing
illegitimate activities or as part of the payment system, the finance minister
said. The focus, however, would be on the distributed ledger system or
blockchain technology that allows organization to record and authenticate
transactions without the need of intermediaries.
Cryptocurrency
is digital money. It is considered to be more secure that the real money.
Cryptocurrency uses something called cryptography to secure its transactions.
Cryptography, to put it in simple words is a method of converting
comprehensible data into complicated codes which are tough to crack.
Cryptocurrencies are classified as a subset of digital currencies, alternative
currencies and virtual currencies.
Bitcoin was the first ever cryptocurrency created in the year
2009. Subsequently, there has been a rapid increase in the number of
cryptocurrencies that have been created some of which are Litecoin, Ethereum,
Zcash, Dash, Ripple etc.
Bitcoins, in India, have slowly started gaining popularity,
given the efforts of the government to move towards a cashless economy.
However, one should know that bitcoins, as of today, are not centrally
administered or regulated by any specific body like the RBI which administers
physical currency in India. In fact, peer-to-peer transactions with bitcoins
are managed using something known as the blockchain technology which serves as
a public ledger for all transactions.
Source
of generation of Bitcoins and its taxability
Considering that there is no specific mention in the Income-tax
regarding taxability of cryptocurrencies, one needs to understand the possible
views which the income tax authorities might take in order to get the income
generated from such transactions within the gamut of taxation in India.
Bitcoins taxability may be looked into from the following
perspective:-
1. Mining
Mining is an activity where an individual (called
the “miner”) uses his computer ability to crack computationally difficult
puzzles. The process of cracking such puzzles which are integral to the
blockchain technology, help in maintaining them. As a reward for this, the
miner gets new bitcoins which is nothing but creation of a bitcoin or mining.
Bitcoins created by mining may be considered as self-generated
capital assets. Subsequent sale of such bitcoins would, in the ordinary course,
may give rise to capital gains. However, one may note that the cost of
acquisition of a bitcoin cannot be determined as it is a self-generated asset.
Further, it also not fall under the provisions of Section 55 of the Income-tax
Act, 1961 which specifically defines the cost of acquisition of certain
self-generated assets.
Therefore, the capital gains computation mechanism fails
following the Supreme Court decision in the case of B.C. Srinivasa Shetty.
Hence, no capital gains tax would arise on mining of bitcoins.
This position would hold till such time the government thinks of
coming up with an amendment to Section 55 of the Act and considering that the
tax authorities consider the income from Bitcoin as capital gain.
However, it is probable and there are high possibilities that
the income-tax authorities may consider income from Bitcoins as ‘income from
other sources’. If the same is considered under ‘income from other sources’, it
will be taxed at the rate of 30% (if it exceeds 10 lacs) instead of 20% in case
of Long term capital gains and the benefit of indexation would not be
available.
2. Bitcoins held as stock-in-trade
Bitcoins held as stock-in-trade and which are transferred in
exchange of acceptable negotiable instrument in India would give rise to income
from business and accordingly, the profits arising out of such business would
be subject to tax as per the individual slab rates.
3. Bitcoins being received as consideration on sale of goods and services
In
case of receiving bitcoin against sale of goods/ services, the bitcoins so
received should be treated at par with receiving of money. Such sale of goods/
services should be taxed under income from business/ profession.
4. Bitcoins held as an investment being transferred in exchange for acceptable Negotiable Instrument
This might have two views. One where Bitcoins are
considered as capital assets then in that case the real currency realised over
and above the cost of bitcoin may be treated as capital gain long term capital
gain/ short term capital gain based on the period of holding. However, if the
income-tax authority do not consider bitcoin as capital asset, then the
provision of capital gain may not be applicable and the same may be taxed under
“income from other sources”.
While this article covers the taxability of Bitcoins, the tax
treatment on transacting with other similar cryptocurrencies would also be
similar to that in the case of Bitcoins considering that they operate in
similar way.
