Section 44AB of Income Tax Act- All about Tax Audit

Anjali Garg
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Section 44AB of Income Tax Act- All about Tax Audit

Section 44AB of Income Tax Act contains provisions pertaining to the tax audit under the Income Tax Audit. Tax audit refers to the independent verification of the books of accounts of the assessee form an opinion on the matters related to taxation compliances undertaken by the assessee. While preparing the books of accounts of the business or profession for the purpose of income tax filing, the assessee has to comply with the provisions of Income Tax Act.

Objective of Tax Audit

Tax audit is conducted to achieve the following objectives:

  1. Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor.
  2. Reporting observations/discrepancies noted by tax auditor after a detailed examination of the books of account and facilitating the administration of tax laws by a proper presentation of accounts before the tax authorities.
  3. To report prescribed information such as tax depreciation, compliance of various provisions of income tax law etc.

Who is required to get the tax audit performed under section 44AB?

As per section 44AB of income tax act, following persons are compulsorily required to get their accounts audited

  • A person carrying on business, if the total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore. This provision is​ not applicable to the person, who opts for presumptive taxation scheme under section 44AD​ and his total sales or turnover doesn’t exceeds Rs. 2 crores.

Amendment to section 44AB– w.e.f. Assessment Year 2020-21 , the threshold limit, for a person carrying on business is increased from Rs. 1 Crore to Rs. 5 crore provided that in case of that person:

(a) aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount; and

(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment.

In other words, more than 95% of the business transactions should be done through banking channels.

  •  person carrying on profession, if the Gross receipts exceed Rs. 50 lakhs during the year.
  • A person carrying on business eligible for presumptive taxation under Section 44AD or Carrying on the profession eligible for presumptive taxation under Section 44ADA but claims profits or gains lower than the prescribed limit under presumptive tax scheme and has income exceeding the basic threshold limit/ amount which is not chargeable to tax.
  • A person carrying on the business declares profit for any Previous Year in accordance with Section 44AD and he decreases profit lower than the profit computed as per section 44AD, for any of the 5 Assessment Year subsequent to the Previous Year and his income exceeds the amount which is not chargeable to tax. In other words, carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one year of the lock in period and income exceeding basic threshold limit.
  • A person carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB but claims profits or gains lower than the prescribed limit under presumptive taxation scheme.

What constitutes Audit report?

 

Tax auditor shall furnish his report in a prescribed form which is Form No. 3CA/3CB and the prescribed particulars are to be reported in Form No. 3CD which forms part of audit report.

  • Form No. 3CA is furnished when a person carrying on business or profession is already mandated to get his accounts audited under any other law.
  • Form No. 3CB is furnished when a person carrying on business or profession is not required to get his accounts audited under any other law.

Who is permitted to perform a tax audit under section 44AB?

A Chartered Accountant who holds the certificate of practice and is in full-time practice may perform tax auditing. The tax auditor (CA) performs a thorough analysis of account books according to the department’s specified formats in form no. 3CA/3CB and Form no. 3CD along with the income tax return.

Penalty of non filing or delay in filing tax audit report

Section 271B of the Income Tax Act is a penalty provision, which penalizes the assessee who fails to get the accounts audited or who fails to furnish the tax audit report within the prescribed time limit. If any taxpayer who is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty:

  1. 0.5% of the total sales, turnover or gross receipts or,
  2. Rs 1,50,000

However, according to section 271B​, no penalty shall be imposed if reasonable cause for such failure is proved.

Due date by which a taxpayer should get his accounts audited

Any person covered by section 44AB of income tax act should get his accounts audited and should obtain the audit report on or before 30th September of the relevant assessment year. For an example Tax audit report for the FY 2019-20 corresponding to the AY 2020-21 should be obtained on or before 30th September, 2020.

Due to the pandemic Covid-19, the due date for the tax audit is pushed back by a month – from September 30, 2020 to October 30, 2020 for FY 2019-20.

Point to Note

If the assessee is liable/ needed to have his account books audited under some other legislation ( say Statutory audit in compliance with the requirements of the Companies Act, 2013), in such a situation, the taxpayer need not get his accounts audited again for income tax purposes. It is sufficient if accounts are audited under such other law before the due date of filing the return and also a report by the chartered accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD

Also Read:

THE TITAN’S TITAN STRATEGY OF “IMPURE TO PURE” AND BUILDING THE TANSIHQ BRAND

Shubham Tibra
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THE TITAN’S TITAN STRATEGY OF “IMPURE TO PURE” AND BUILDING THE TANSIHQ BRAND

Tanishq’s early commercial ads were presented in a luxurious ambiance and showed studded and diamond jewelry. All this served to win over the elite customer base. But it also served the perception that Tanishq was a high-price band.

In a ground-breaking initiative, Tanishq introduced “Karatmeter” at all its outlets, a device to check the purity of gold. And they invited customers to walk in with any piece of jewelry and measure its purity for free.

It was too irresistible an offer to miss, and women streamed in to check their gold ornaments bought from the family jeweler out of blind trust since years.

Reportedly, majority of them were shocked to discover that they had been cheated by their family jewelers.

But the sales were still the same. People still came into the stores just to check their jewellery.

The Karatmeter was telling people that their jewellery was worth less but the Tanisq was not offering any solutions to the problem. Sales were still the same and Tanishq’s teams were at their wits end.

At that time, it came up with a turnaround strategy of ‘Impure to pure’.

Women could bring in their gold jewellery and test it on the Karatmeter. If the purity of their jewellery was lower than 22 carat and higher than 19 carat, it could be exchanged for Tanishq’s 22-carat jewellery of their choice by paying only the manufacturing charges.

Yes! Tanishq would bear the cost of the gold.

As a result, Tanishq build its brand as a synonym of trust & purity. Since then, it’s been a market leader all over India.

Tanishq changed attitude of customers by winning over them with informed trust rather than blind trust.

The key had been to identify the problem and offer a solution. It was not surprising that this scheme became popular all over India. Tansihq has been growing with similar strategies ever since and is the most valuable company in this segment.

All this happened despite huge challenges of economic slowdown, unorganized market, unfavorable changes in tax structures and many others.

So what’s your turnaround strategy post lockdown for your business?

What’s the favorite turnaround strategy you have come across?

Would be happy to know in comments.

Thanks.

BIG 4 – Shift from an Accounting Firm to a Professional Service conglomerate globally!

Shubham Tibra
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BIG 4 – Shift from an Accounting Firm to a Professional Service conglomerate globally!

The Big 4’s are world’s four largest professional service firms.

We can call them as the secret Google, Microsoft, Apple & Amazon of Accounting firms. Their revenues are huge and they have strong entry barriers in their sector. They have large employee strength and presence in almost all major economies of the world.

So first let’s have a look at some brief statistics about these firms:

Now interestingly, if we look at the next big 4 firms, we realized that the closest one to them are actually too far..!

The revenue of KPMG (last of the Big 4 in terms of revenue) of $ 29.75 Billion hugely surpasses the combined revenue of Big 5 to Big 8 (BDO, RSM, Grand Thornton, & Crowe) i.e. $ 25.36 Billion.

This shows that there is no one remotely close to the Big 4 in terms of its revenue, market share, technology & employee strength.

It is estimated that Big 4 audits 80% of the Listed Companies in the world.

But interestingly, Big 4 generates only 1/3rd of their revenue from Audit Fees.

The ambit of services provided by these firms is so huge that it’s wrong to call them the Big 4 Accounting Firms.

They should be correctly called as a “Professional Service Conglomerates”

Now the question is, How they did it?

As we can see, each of the Big 4 has more than 100+ years of existence.

And all of them had done one thing in common to reach where they are today.

“Mergers & Acquisition”

Previously, there were numerous large accounting firms. Each of them used to dominate in their own country unlike today.

In 20th Century, some firms realized the importance of merger and acquisition eventually established large scale presence around the globe.

In the 20th Century, after a lot of mergers and acquisition, the Big 8 firms used to dominate the industry:

Subsequently,

Ernst & Whinney merged with Arthur Young to form Ernst & Young

Deloitte Haskins & Sells merged with Touche Ross to form Deloitte & Touche.

And Price Waterhouse merged with Coopers & Lybrand to form PricewaterhouseCoopers

Finally, the insolvency of Arthur Anderson because of the 2001 Enron Scandal left the world with the Big 4 that we have today:

  • Ernst & Young
  • Deloitte & Touche
  • KPMG
  • PricewaterhouseCoopers

It’s also worthwhile to note that they are not firms but a network of member firms agreeing to operate under a common brand name

The firms are go giant that at times it looks like these firms would continue to dominate the sector forever.

But the fall of Arthur Anderson proved that even Big firms can collapse.

On the other hand, the Big 4 has learnt a good deal of lesson with the fall of Arthur Anderson and are found to be continuously improving on Risk and Reputation matters especially in India after their alleged involvement in Satyam & IL&FS Scandals.

Honestly, they have been constantly developing advanced technologies and methodologies and are way ahead of their competition.

Now these lead me to recall the speech of our Prime Minister Shri Narendra Modi on CA Day back in 2017. He expressed a vision of having the presence of Big 4 Indian Firms among the world’s Big 8 firms.

Although with the above data, it appears to be impossible. But we should not forget, that this was the statement coming from the PM of India. And the speeches given by our PM are always well researched, well drafted & fact checked by his team. As I begin to research on the viability of the vision, I came across the following road map.

So how can we form Indian Big 4 amongst global Big 8?

Well, honestly this would include a lot of endeavor from the top Chartered Accountant firms in India. Some of them can be listed as below:

  • They have to merge within themselves and make lots of mergers & acquisitions around the globe.
  • The existing Indian Member Firms has to leave the network of Global Big 4 and join Indian Networks.
  • This Indian network firms will have to build reputation for providing quality services around the globe.
  • The business houses had to follow Nationalism by hiring Indian firms instead of Big 4’s.
  • Fall of 1 or more Big 4 firms just like Arthur Anderson due to Enron Scandal.
  • And most importantly, expecting the Big 4 not to do anything all this while.

All of this seems quite difficult, extremely superficial and rather impossible.

Even if few of the big Indian firms comes together, there would a huge challenge to work under a common brand name and maintain transparency.

But not to forgot, it’s a vision by our PM. And vision have always been of such kind. Difficult & Impractical.  After all, vision easily achievable is not a great vision at all..!

The whole vision is nice to hear & think. But its easier said than done. All we can say at this moment, Big 4 stands too Big to be replaced by any of their competitors around the globe.

Sources:

https://www.wikipedia.org/

https://www2.deloitte.com/us/en.html

https://www.pwc.com/gx/en.html

https://www.ey.com/en_us

https://home.kpmg/xx/en/home.html

Covid-19: Bankruptcy Dominoes

Rahul Manglam
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Covid-19: Bankruptcy Dominoes

As on 10th of May 2020, there are around 4.06 million reported cases of coronavirus confirmed all around the globe, costing humanity as many as 280’K lives. And, looking forward it looks like the virus isn’t going to spare companies either. Since the pandemic had brought the whole world and economies along with it to a standstill the companies and firms are having a hard time to keep their businesses afloat with no or very little cash flow and debts and liabilities piling up.

Companies have perpetual succession they usually enjoy a continuous existence whereas us human we have an end i.e. death, for companies that end is usually when they’re liquated voluntarily or when they’re forced into bankruptcy. Bankruptcy isn’t a death sentence. Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by court order, often initiated by the debtor.

Since major COVID-19 led bankruptcies are filed by US multi-national companies, we should have a brief idea about their Bankruptcy Code. In US a company can file for bankruptcy under six chapters under their Bankruptcy Code, however, the major ones are

  • Chapter 7: basic liquidation for individuals and businesses; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available
  • Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; known as corporate bankruptcy, it is a form of corporate financial reorganization which typically allows companies to continue to function while they follow debt repayment plans
  • Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy

Major companies that have filed for (Chapter 11, not Chapter 7) bankruptcy include:

  1. J.Crew Group: The classic clothing brand J.Crew, the seller of sweater vests, chinos, is one of the first major retailers to seek bankruptcy protection in the U.S. According to its May 4 filing, the group which runs both J.Crew and Madewell will convert $1.65 billion of its debt into equity with lenders and has secured $400 million in “debtor-in-possession” financing, which lets companies stay operational while undergoing bankruptcy. However, the company expects to re-open 181 J.Crew stores, 171 J.Crew factory stores, and 140 Madewell stores after coronavirus restrictions are lifted.
  2. Gold’s Gym: The fitness center chain, which started in Venice Beach, California, filed for bankruptcy on May 4. The company closed its empire of roughly 700 gyms during the coronavirus pandemic, 30 of which will remain closed after the bankruptcy. However, the company will continue to reopen the rest of its gyms throughout the process, depending on federal, state, and local guidelines.
  3. Dean & Deluca: The luxury grocer was already hanging by a thread when it was heading into 2020, as it closed its founding, flagship store in Soho, New York, in October. In its April filing, which finally cited the coronavirus pandemic as a final straw, listed only one employee and $500 million in liabilities against $50 million in assets. However, the company still hopes to reopen Dean & Deluca locations in New York in the near future.
  4. True Religion: The company filed for bankruptcy in April for the second time in three years. While the brand was already navigating a slump, the government-ordered shutdowns of brick-and-mortar stores due to the coronavirus pandemic sent the company into bankruptcy once again.
  5. Speedcast International: is an Australian satellite internet company whose global maritime network serves 80% of cruise ships around the world filed for bankruptcy in April. The company referred to their weakness in the cruise market as the coronavirus pandemic has curbed recreation and leisure travel, which worsen the company’s $600-odd million in an old debt, rendering it “impossible” to grab equity lifelines. Now that the company have filed for bankruptcy the company will restructure, backed by $90 million in debtor-in-possession financing.
  6.  Flybe: is a British airline that used to provide more than half of U.K. domestic flights outside of London, entered administration that is U.K. equivalent on bankruptcy proceedings on March 5. Most of Flybe’s flights had been cancelled and grounded as Europe which was quickly becoming the epicenter of the coronavirus pandemic. Since the company’s $128 million (100 million British pounds) aid request was denied by the U.K. government. Since the airline was already struggling and denial of aid in such times left the company with no option but to file for bankruptcy.
  7. Virgin Australia: one of Australia’s largest airlines co-founded by billionaire Richard Branson became the world’s largest carrier to file for bankruptcy through voluntary administration in Australia. The company’s plea for a $903 million (1.4 billion Australian dollars) loan from the Australian government was denied. The company haven’t had posted profits for the last 7 years prior to coronavirus pandemic, however, potential buyers believe it can survive with restructuring.

Despite heath crisis, few Startups are still pivoting

Priya kejriwal
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Despite heath crisis, few Startups are still pivoting
“Never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.” Well said by Rahm Emanuel The current situation has prompted many startups to rapidly change course. Many new startups have be tumbledown yet there are many with lots of innovative and agile which has seen growth prospects in this global crisis. Working remotely and efficiently is the new mantra in Asia’s third-largest economy. Gyms have moved their workout sessions online and there has been a growth in apps and IT platforms that can help people work remotely. Let have a look at few global startups, which are able to pivot their way from Coronavirus:
  1. Mobikwik
Mobikwik is one of the most used startup app used these days.  It is simple, fast and allows Hassle Free payments.it eyes Rs 1,000 cr business from payment gateway during this lockdown. Payments of essential services like gas and electricity bills, mobile recharge even essential commodities like medicines and groceries are done by digital payment apps like Mobikwik, as cash cannot be deposited.
  1. Zoomcar
Zoomcar, a self-drive car rental startup has joined hands with other B2B business to provide daily essential needs. It plans to ease the emergency transportation for government officials, bankers, healthcare professionals, and delivery staff along with large food tech, logistics and health tech players.
  1. Gaming like houseparty and psych
International games such as Houseparty and Psych have emerged as one of the most-played games during the quarantine period. In fact, their user engagement has reached a level that users are experiencing lags in the interface of Psych. In India, the season of gaming startups appears to be at its peak. It has seen 3x increase in game plays and 30% higher traffic
  1. Raymond
Raymond being one of the leading suit manufacturing startup has taken this opportunity to manufacture hand sanitizers and various cloth mask to cater the excess demand
  1. Reliance Jio provides work from home plan
Jio is not just a telecom network; it is an entire ecosystem that allows Indians to live the digital life to the fullest. Work from Home Pack provides users 2GB high-speed data/day for 51 days. Data can be used to access all Internet content. The pack validity will start immediately on recharge. In case you have an active valid plan then the WFH pack will be auto-activated on expiry of daily data allocation.
  1. Aarogya Setu
Aarogya Setu App, India’s main contact tracing technology, was launched on April 2nd this year. The app was developed by the National Informatics Centre under the Ministry of Electronics & Information Technology. According to data it become the world’s fastest app to reach 50 million downloads in just 13 days. Aarogya Setu is designed to keep track of other app users that a person came in contact with. It then alerts app users if any of the contacts tests positive for COVID-19.
  1. Thoughtful Human
Thoughtful human a greeting card startup with a difference, it produces cards that help people communicate with loved ones honestly when faced with challenging circumstances such as grief – and more recently, the pandemic. It has collaborated with Better Help to offer a free month of online therapy via messaging, chat, phone or video sessions
  1. Coding dojo
Coding dojo is accepting projects on a voluntary basis; typical tasks include things like adding takeout delivery features for restaurants. It recently launched an initiative that seeks to connect its alumni coders to small businesses that need website development services to help them adapt to the current circumstances.
  1. Populus Coworking 
Next up is coworking space like populous coworking; Populus is perfect for individual entrepreneurs, consultants, and creators as well as small businesses of 2-20 people. It has decided to organize a free all-day conference (aptly named The Living Room Conference.)
  1. 3D Hubs
On 3D hubs platform, engineers can easily upload their design, instantly receive a quote and start production. It is using its global network to produce personal protection equipment (PPE) through a special crowdfunded COVID-19 Manufacturing Fund. Concluding, that startups should be better prepared to battle the new recessionary wave, as there will be facing a mountain of expenses, while there are no corresponding revenues. Yet the lockdown has meant a mixed bag of gains and losses for most of the startups. All the startups are now waking up to the fact that this is how consumers are going to engage with health care, and how quickly they need to adapt to this kind of a new reality. There is ways a ray of hope for one who are willing to work. Few smart strategy for startups in this current situation are to Plan policies for next 3 months/9 months/18 months and Keep your team engaged!

Set off and Carry Forward of Losses under Income Tax 1961

Priya kejriwal
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Set off and Carry Forward of Losses under Income Tax 1961

This article focuses on provisions of The Income Tax Act, 1961 and rules made there under relating to Set Off and Carry Forward of Losses.

Adjusting of income under one head against the loss under another head is called setoff. This is done to arrive at taxable /total income.

Various provisions are as follows:

Section 70: INTER SOURCE ADJUSTMENT (INTRA HEAD ADJUSTMENT)

SECTION 70 deals with the set off of loss from one source against income from another source under the same head of income, subject to following exceptions:-

  1. Long term capital loss can be set off only against long term capital gain.
  2. Loss of a speculation business can be set off against profits of speculation business
  3. Loss incurred in activity of owing and maintaining race horses can be set off against income of that activity only
  4. Loss from a source , income of which is exempt u/s sec10
  5. No loss can be set off against winning from lotteries

example:- loss of one self occupied property can be set off against income of let out property

SECTION 71:- INTER HEAD ADJUSTMENT

Where in respect of any assessment year, the net result of any head of income is a loss; the same can be set off against the income under any other heads for the assessment year, subject to following exceptions:

  1. Capital gains loss cannot be set off against income under any other head.
  2. Loss of a speculation business cannot be set off against any other income other than profits of speculation business
  3. Set off loss from house property shall be restricted to rs.200000 for any assessment year.

exapmle:- Losses in one business can be set off from profits in another business – CIT v/s Muthuram Chettiar (1962) 44 ITR 710(SC).

SECTION 71 B: LOSS UNDER HEAD ‘INCOME FROM HOUSE PROPERTY’

Loss under the head ‘income from house property’ can be carried forward and can be set off against income under the same head only.

Period for which carry forward shall be allowed: 8 assessment years immediately succeeding the assessment year in which such loss is first computed.

example:- loss from one sold out house can be set off against other income of let out house.

SECTION 72: CARRY FORWARD AND SET OFF OF BUSINESS LOSS OTHER THAN SPECULATION LOSS

Loss under the head ‘profits and gains of business or profession’ (OTHER THAN SPECULATION LOSS) can be carried forward and set off against ‘business profit’. For this purpose business profit includes profits derived from a business activity but assessable under the heads other than ‘profits and gains of business or profession’

Period for which carry forward shall be allowed: 8 assessment years immediately succeeding the assessment year in which such loss is first computed.

example:- loss of car business can be set off and carried forward against profits of computer business

SECTION 73:- : CARRY FORWARD AND SET OFF OF SPECULATION LOSS

Losses from speculative transaction/business can be carried forward & set off against income from speculative business only.

Period for which carry forward shall be allowed: 4 assessment years immediately succeeding the assessment year in which such loss is first computed.

example: If a speculator believes XYZ Company stock is overpriced, they may short the stock, wait for the price to fall, and make a profit. The loss incurred for the time being can be set off against such speculative activities only.

SECTION 73 A:- : CARRY FORWARD AND SET OFF OF SPECIFIED BUSINESS

Any loss, computed in respect of any specified business referred to in section 35 AD shall not be set off except against profits and gains, if any, of any other specified business.

Period for which carry forward shall be allowed: An infinite year till the loss is not set off.

example:-loss from laying and operating a cross-country natural gas pipeline network for distribution can be set off against such specified business only.

SECTION 74:- : CARRY FORWARD AND SET OFF OF CAPITAL LOSS

Losses under the head ‘capital gains’ can be carried forward and set off against income under the same head, subject to restriction that the loss on transfer of long term capital assets can be set off only against long term capital gain.

Period for which carry forward shall be allowed: 4 assessment years immediately succeeding the assessment year in which such loss is first computed.

example:-  Miss Seema purchases a building in January 2014 and sells it in January 2015, holding it for just a year, making it short term capital asset. On sell it was a short term capital loss which can be set off against long term capital gain, if any.

SECTION 74 A:- : CARRY FORWARD AND SET OFF FROM ACTIVITY OF OWING AND MAINTAINING RACE HORSES

Losses under the activity of owing and maintaining horses can be set off against profits of the same activity only.

Period for which carry forward shall be allowed: 4 assessment years immediately succeeding the assessment year in which such loss is first computed

Types of Losses Intra   Head Adjustment Inter Head Adjustment Carry Forwarded Brought Forward Losses to be Set Off against Time Limit to carry forward Man datory filing of return of income
Loss from House Property Allowed Allowed, upto Maximum of Rs. 2,00,000 from AY 2018-19 Allowed Income from House Property 8 Years No
Loss from Speculative Business Only against Speculative business income Not Allowed Allowed Income from Speculative Business 4 Years Yes
Loss from Specified Business Only against Specified business income Not Allowed Allowed Income from Specified Business Unlimited Yes
Other Business Losses Allowed Allowed, except from Salary Income Allowed Income from Normal Business Yes
Short Term Capital Loss Only against STCG & LTCG Not Allowed Allowed STCG & LTCG 8 Years Yes
Long Term Capital Loss Only against LTCG Not Allowed Allowed LTCG 8 Years Yes
Loss from Owing & Maintaining Race Horses Only against income from Owing & Maintaining Race Horses Not Allowed Allowed Income from Owing & Maintaining Race Horses 4 Years Yes
Other Loss under ‘Other Sources’ Allowed Allowed Not Allowed N/A N/A N/A
Loss from Salary Loss from Salary Not Possible

Tax Residency- Amendments in Budget 2020 and Impact on NRIs

Khushi Surana
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Tax Residency- Amendments in Budget 2020 and Impact on NRIs

The Finance Bill introduced alongside the Union Budget 2020 brought about an amendment in Section 6 of IT Act,1961 “Residence in India”, leading to Modification in Residency provisions and impact on NRIs.  

The Residential status of any person is the very foundation for determining whether a person is liable to be tax in India and if so liable, how much of his income is under the purview of Indian Taxation laws. It is of sheer importance for the government to frame residency provisions with unambiguous clauses so that there are no loopholes to facilitate any escapement of income. 

To understand the amendments, it is primary to know the requirements for being a Resident in India: 

As per the Section 6(1) of the I.T Act 1961, an individual taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions: 

a) Stay in India for a year is 182 days or more, or

c) Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year

  1. Earlier: Clause (b) of Explanation 1 of Section 6 sub-section (1) provides that an Indian citizen or a person of Indian origin shall be Indian resident if he is in India for 182 days instead of 60 days in that year in condition 6(1)(c) of residency requirements. This provision provides relaxation to an Indian citizen or a person of Indian origin allowing them to visit India for longer duration without becoming resident of India.

Amendment:  “in clause (1), in Explanation 1, in clause (b), for the words “one hundred and eighty-two days”, the words “one hundred and twenty days” shall be substituted;” 

However, an amendment at the time of passing of the Budget provides that the reduced period of 120 days shall apply, only in cases where the Total Indian income (i.e., income accruing in India) of such visiting individuals during the financial year is more than Rs 15 lakh.

Amendment Meaning: As per the Finance bill, 2020 the extension of 182 days has been reduced to 120 days. Accordingly, visiting NRIs whose total taxable income  in India is upto Rs 15 lakh during the financial year will continue to remain NRIs if the stay does not exceed 181 days, as was the case earlier. Hence besides monitoring the number of days present in India, an individual is also required to keep tab of his Indian Taxable Income.

For an example if an NRI, whose Indian taxable income exceeds Rs 15 lakh stays in India for 120 days or more i.e let say 150days, then such individual additionally has to check whether his stay in India in the immediately preceding 4 years is 365 days or more. In case the stay in preceding 4 years is let say 375days, then in such a case the NRI will be treated as Resident Individual for Income Tax purposes.

While this may concern many NRIs, but in a relief they will be treated as “Resident but Not Ordinarily Resident (RNOR)”. This would be a relief as their foreign income (i.e., income accrued outside India) shall not be taxable in India. 

 Analysis: The relaxation given to citizens of India and persons of Indian origin was to allow them to visit and stay in India longer than the other persons. However, this allowance is being misused. Such arrangements were made by individuals wherein they would carry out substantial business and other practices but also not exhaust the “182 days” limit as stated it law, and therefore not required to pay tax on their global income of a financial year. This is not a tax evasion in prima facie, but practices such as these indicate tax avoidance which leads to a whopping revenue loss for the government. Hence, to curb such substandard practices a lower limit of “120 days” has been implemented. 

  1. Amendment- Insertion of new sub-section“(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

Amendment Meaning: A new sub-section (1A) has been inserted which states that if any person who is a citizen of India or is a person with Indian origin, who is not liable to pay tax in any other country for the very reason of his non-residency in any other country including India, he will be deemed to be a Resident in India in such case. 

Analysis: In the era of Double Taxation Avoidance Agreement and a Global Tax environment, it is undesirable of any individual to be escaped from either or any of the countries he/she/they are working in. It would defeat the very purpose of harmonious taxation systems in the world. High Net-worth Individuals (HNWI) particularly resort to such arrangements where they successfully manage to not come under the tax jurisprudence of any country. This leads to revenue loss as persons with higher income slab are getting away from the taxation purview. This amendment in particular is a genius move by the Finance Ministry as it would put a full stop to a majority of tax avoidance undertaken by the HNWI. 

In case of NRIs who are residing in UAE, Saudi and certain countries (which do not levy personal income tax) and have taxable Indian income of more than Rs. 15 lakhs, a question arises whether they can be treated as “liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature”. In the context of the Double Tax Avoidance Agreement with the UAE, the Indian judicial and advance ruling authorities have taken a view that “liable to tax” need not be equated with “payment of tax”. As per Indian UAE Tax Treaty and the Protocol, a person who stays in UAE for more than 182 days in a year is eligible to get a “tax residency certificate” and is treated as tax resident. In view of the above and the clarification issued above, such persons would not get covered by the above deemed resident criteria.

  1. Earlier: Sub-section (6) of Section 6 provides A person is said to be “not ordinarily resident” in India in any previous year if such person is—

(a) an individual who has been non-resident in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for an overall period of 729 days or less.

(b) thereof contains similar provision for the HUF.

 Amendment- “for sub-section(6), the following shall be substituted, namely:   

(6) A person is said to be “not ordinarily resident” in India in any previous year, if such person is—  

(a) an individual who has been a non-resident in India in seven out of the ten previous       years preceding that year; or 

(b) a Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year”

Amendment Meaning: The change can slightly be perceived as a liberal change as the newly introduced condition says that, an individual or Hindu Undivided Family will be a non-resident for a financial year if the individual or HUF manager has been a non-resident for 7 out of 10 years preceding that year. 

Analysis: The amendment has scrapped out the second condition which limits the number of days of stay to 729 days. In interpretation, this is to avoid a sudden liability on an individual or HUF if he stays in India even for a day more. It is also pragmatic as an assessee would seldom count the number of days. Secondly, the liberalized clause now allows a person to be a non-resident even if he/she/they have been a Non-resident for 7 years instead of 9 years. 

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.

The changes introduced in the residency provisions clearly indicate the government’s focus on widening the tax base and increasing tax revenues by plugging any avenues for tax planning. It is, therefore, important for Indian Citizens and Persons of Indian Origin and also globally mobile employees to carefully evaluate their residential status and assess their tax liability in India accordingly. 

What’s next De-Globalization?

Rahul Manglam
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What’s next De-Globalization?

Deglobalization is the process of diminishing interdependence and integration between certain units around the world, typically nation-states. It is widely used to describe the periods of history when economic trade and investment between countries decline. It stands in contrast to globalization, in which units become increasingly integrated over time, and generally spans the time between periods of globalization. While globalization and deglobalization are antithesis, they are no mirror images.

As the Coronavirus or COVID-19 has made the superpower nations like The United States, China, and many others bend their knees, nearly 187 territories have confirmed the presence of the virus, all countries have felt the need to be self-sufficient. The whole world is aware of the fact that China is the manufacturing hub for various countries, and many multinationals in a number of fields like automobile, textile, pharmaceuticals, etc. According to data published by the United Nations Statistics Division, China accounted for 28% of global manufacturing output in 2018. With total value added by the Chinese manufacturing sector amounting to almost $4 trillion in 2018, the manufacturing sector accounted for nearly 30% of the country’s total economic output.

Post the COVID-19 pandemic the whole global supply chain is interrupted since China was where the virus originated in its Wuhan district in December 2019. According to the latest reading published by the National Bureau of Statistics on Saturday, the Manufacturing Purchasing Managers Index (PMI), a measure of factory activity across the country, plummeted to a record low of 35.7% in Feb 2020, indicating a deep contraction. This break in the supply chain is very catastrophic since most of the major economy depends on such demand and supply, making the whole global economy suffer.

This COVID-19 pandemic has been one of the biggest eye-openers for the European Union as they were mainly dependent on China and India for their medical supplies who have slashed their exports since the pandemic. The countries of the European Union imported drugs and medicines worth nearly $150 billion in 2019. Reasons like unavailability of medical supply for the nation are compelling enough for a country to promote de-globalization to some extent or at least become self-sufficient in necessities so that in situations like these they don’t have to be dependent on other nations. We have statements from Government officials Bruno Le Maire, the French Finance Minister, who made the following statement “we should reduce our dependence on great powers such as China.” 

Reports are saying many companies have realized the risks of this over-interdependence and intend to curb it. A recent Bank of America report states that 80% of the multinationals investigated plan to repatriate part of their production, known as re-shoring, a trend that COVID-19 could turn into a tidal wave. In a survey by the American Chamber of Commerce in Singapore, 28% of those polled said they are setting up, or using, alternative supply chains to reduce their dependence on China.

When this pandemic finally ends, we don’t know the exact stage in which globalization will resume but it’ll be in a guise that is less intense and different from the one we have known up to now.

Calculate Interest under section 234A, 234B, 234C of Income Tax Act

Neha Kabra
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Calculate Interest under section 234A, 234B, 234C of Income Tax Act

Filing of Income Tax Returns and paying taxes are the responsibility of every Indian citizen. Failure in paying the tax or filing the ITR can lead to interest payments. It is in your utmost interest to file your Income Tax Returns on a regular basis within the prescribed time. It not only makes you a law-abiding citizen but also saves you from being charged with interests by the income tax department.

A taxpayer is required to pay interest on account of failure to file a return within prescribed limit or on account of failure in filing return at all.  There are certain types of interests that are to be paid by taxpayer in case there has been non-payment of taxes. In order to learn calculating interest under sections 234A, 234B and 234C, let us learn what causes interest payment under such sections:

Section 234A of Income Tax Act: Interest for defaults in furnishing return of income

Income Tax Returns for a financial year need to be filed within the time limit prescribed for each year for assessee. Failure to file a return within this prescribed time or not filing return at all will attract this Interest. If you have unpaid taxes that are outstanding and you have not filed your returns by the due date, you will be charged an interest amount of 1% per month or part of the month (simple interest) on the tax amount outstanding. This interest will be calculated from the due date applicable to you for filing of return of the relevant financial year till the date that you actually file your return.

In order to know about calculation of interest under Sections 234A, let us take the help of this example,

Mr. A has an outstanding tax of Rs. 1,00,000 (net of advance tax paid & TDS if any). He does not file his return before the prescribed due date i.e 31st July and files the same on 20th December. Since he missed the actual date for filing the return, interest for 5 months will be charged,

Interest = 1,00,000*1%*5 = Rs. 5,000

Rs 5000 is the payable interest under section 234A by Mr. A

Therefore, Mr. A would now have to pay Rs. 5,000 as interest which is over and above his outstanding tax. Not paying his dues till March, he will be charged at the rate of 1% per month till the end of the financial year that is 31 March.

 Section 234B: Interest for defaults in payment of advance tax.

If an individual have to pay Rs 10,000 or more as taxes in a year, advance tax will be applicable. Advance Tax means paying your tax dues on the due dates provided by the income tax department. If advance tax is not paid on time or there is default completely, interest under section 234B will be levied.

Businessmen, professionals, and salaried employees are liable to pay advance tax, where tax payable amounts to Rs 10,000. Under Section 44AD, when a taxpayer opts for computing business income, which has a turnover of 8% on presumptive basis, he is exempted from paying advance tax. Senior citizens above 60 years and with no income are also exempted under this section.

Under Section 234B of Income Tax Act, the taxpayer shall pay at least 90% of the tax that is due to be paid at the end of the financial year. In case the payment of advance tax is delayed, then the taxpayer shall be liable to pay simple interest at the rate of 1% for every month or part of a month, advance tax can be paid on a quarterly basis.

In order to know about calculation of interest under Sections 234C of Income Tax Act, let us take the help of this example,

Mr. B has total tax liability of Rs.52,000 for A.Y. 2020-21, out of which Rs. 30,000 was paid as advance tax by him on 9th March,2020, remaining 22,000 was paid at time of filing of return on 29th May,2020.

Even though Mr. B has paid advance tax, we need to check whether he paid at least 90% of the assessed tax as advance tax or not. Assessed tax is Rs 52,000. 90% of assessed tax is Rs 46,800. However, Mr. B deposited only Rs 30,000, which is less than 90% of assessed tax. Therefore, Mr. B is liable to pay interest under section 234B.

Interest = (Tax Liability- Advance Tax)*1%*Months Delayed

             =(52,000-30,000)*1%*2 = Rs. 440

Rs 440 is the payable interest under section 234B by Mr. B

Also Read:

Section 234C: Interest for deferment of advance tax

Income tax should be paid on time every financial year to avoid interes on late payment of taxes. Below mentioned table provides with the due dates for paying advance tax and also interest under section 234C on such late payment:

Due date for paying Advance Tax on or before   Amount to be paid Rate of Interest u/s 234C and period of interest
15th June 15% of Amount* less tax already deposited before June 15 Simple interest @1% per month for 3 months  
15th September 45% of Amount* less tax already deposited before September 15 Simple interest @1% per month for 3 months  
15th December 75% of Amount* less tax already deposited before December 15 Simple interest @1% per month for 3 months  
15th March 100% of Amount* less tax already deposited before March 15 Simple interest @1% per month for 1 month  

Amount*- the amount to be paid, is calculated after tax deductions under Sections 90, 91, and 115JD

In order to know about calculation of interest under Sections 234C, let us take the help of this example,

Mr. C is liable to pay tax of Rs. 2,00,000. The same is paid as follows:

Due Date on or before Advance Tax Payable Total Advance Tax Paid Cumulative Shortfall Cumulative Interest u/s 234C
15th June 30,000 15,000 15,000 @1%*3*15,000 = 450
15th September 90,000 50,000 40,000 @1%*3*40,000 =1,200
15th December 1,50,000 70,000 80,000 @1%*3*80,000 =2,400
15th March 2,00,000 60,000 1,40,000 @1%*1*1,40,000 =1,400

These were some details regarding interest calculation under Sections 234A, 234B, and 234C of the Income Tax Act. Pay all advance tax and dues on time to avoid interest liability .               As “Money Saved is Money Earned”.

PMT 09- For rectification of GST dues paid under wrong head

Vedant Biyani
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PMT 09- For rectification of GST dues paid under wrong head

CBIC via notification No. 31/2019 dated on 28th June 2019 introduced form PMT-09  to save the registered taxpayers from blockage of business fund that occur during the period of refund application of excess balance in the electronic cash ledger in FORM RFD-01 due to wrongly or erroneously paid ITC under wrong head.

For this Government made changes in the amendment in Finance (No. 2) Act, 2019 (23 of 2019) by inserting sub section 10 and 11 to Section 49 of The CGST Act, 2017 on  30th Aug, 2019 which is applicable w.e.f. 01st Jan, 2020 in accordance with Rule 87 of The CGST Rules, 2017. However this was made live on portal i.e https://www.gst.gov.in/ on 21-04-2020.

What is Form PMT-09?

Form PMT-09 (i.e. a challan) is used to transfer any amount of tax, interest, penalty, etc. that is available in the electronic cash ledger, to the appropriate tax or cess head under IGST, CGST and SGST in the electronic cash ledger. This enables taxpayer to transfer amount from one minor head/ major head to another minor head/major head and such transfer shall deemed to be a refund from the electronic cash ledger under this Act.

Major heads in Electronic cash ledger refers to: – Integrated tax, Central tax, State/UT tax, and Cess.

Minor heads in Electronic cash ledgers refers to: – Tax, Interest, Penalty, Fee and Others.

Example: What can be rectified by PMT-09

  • If a taxpayer has wrongly paid CGST instead of SGST, he can now rectify the same using Form PMT-09 by reallocating the amount from the CGST head to the SGST head.(Major to Major )
  • If a taxpayer has wrongly paid CGST/SGST under the head of Interest or penalty or Vice versa (Major to Minor)
  • If a taxpayer has wrongly paid Interest amount under the head of penalty or Vice versa (Minor to Minor)

Important points about PMT-09 are mentioned as below:-

  1. This Challan is not useful if the wrong tax paid has been utilized for making any payment. This Form only allows transfer of the amounts that are available in the electronic cash ledger at the time of filing of PMT-09.
  2. The amount once utilized and removed from cash ledger cannot be reallocated.

Procedure for filing of PMT-09:-

  • Login to GST Portal.
  • Click Services > Ledgers > Electronic Cash Ledger> File GST PMT-09 For Transfer of Amount.
  • After filling the required details in add record table save the changes and check the updated balance through preview of cash ledger.
  • Then File the Form PMT-09.

The revised balance would be updated in cash ledger after filing of Form PMT-09.

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