In this blog post, Shreya Saraiya, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the different forms of taxation in India.  

Direct Tax

A tax which is directly paid by any person to the entity which is imposing it is called as Direct Tax.  It is also called as ‘income Tax’ as it is directly levied on the income of any person and burden to pay the tax is on the same person to is earning the income and cannot be pass or Profession on to other persons. The Taxation laws of India were revised and the administration of taxes was rationalised to suit the requirements of the era of Globalisation, Privatisation and Liberalisation introduced by the way of economic reforms in the year 1990 in India. This led to tremendous growth in collection of taxes from individuals. The tax revenue of the Government of India scaled up from being Rs. 24.6 billion in the year 1990 to 103.76 billion in the year 2000.

The money valuation of a net accretion between two phases of  time is called as income. As per flow of wealth concept, income can be described as net flow of wealth to a taxpayer in a particular period of time.  The computation of Income of an individual falls under the following heads according to the Section 14 of  Income Tax Act,1961 (the Act) –

Salaries – wages, any annuity, any type of fees, commission, advance or salary, arrears of salary according to Section 17 of the Act.

Income derived from House Property–  as per  Section 22, in certain conditions, income derived from rent of the House Property is subject to taxation

Profits derived from gains of Business  or Profession– the income which is derived from the profits from the business or profession is liable to tax

Capital Gains– the gain or profit derived from transfer of any capital asset is called as Capital Gain and income derived from Capital Gain is subject to taxation, according to Section 45 of the Act.

The most important source of direct tax in India is Income Tax.  The role of Income Tax as

Source of direct tax has taken a backseat since the introduction of Corporate Tax and Union Excise duties, as they contribute significantly as revenue to the Government of India.

Role and Significance of Income Tax

The assesses under the garb of Income Tax in India are individuals, Hindu Undivided Families and Unregistered Firms and associations of persons. The contribution of Income Tax to the growth of country’s economy can be determined by examining the ratio of Income Tax to the total revenue of the country, national Gross Domestic Product.  The economist G.S. Sahota was the first person who initiated to undergo the study of  buoyancy and elasticity of Income Tax in India. The level of buoyancy is an indicator of exploitation and the study by Sahota revealed that the Income Tax elasticity is lower that Income Tax buoyancy.

Goods And Services Tax

All the indirect taxes which are levied upon the manufacturing, sale and consumption of goods and services at the State and Central level are subsumed under a single, broad and  comprehensive framework of Goods and Services Tax (GST).  It has overhauled the taxation regime in India and is aimed to transform the tax regime into a harmonised and efficient one. In the layman’s language, GST can be understood as VAT on goods and services at the national level, difference being the coverage of service under its ambit.

The tax mechanism initiated by GST is that it entails the payment of tax at each stage of sale of goods or provision of services. The service provider or seller of goods is entitled to avail the provision of input credit for the purpose of making use of services of purchasing the goods and after that the credit can be used by him for setting off against the amount payable on the supply of Goods or Services. It can be regarded as the consumption tax collected on the addition of value of goods or services at each stage of consumption. The person who is on the end side of the supply chain bears the responsibility of paying tax, therefore GST can be referred to as last-point retail tax.

Historical Background

The historical background of GST highlights its origin in France in 1954. Later in 1980s , the Manufacturer’s Sale Tax of Canada was replaced by the GST.  The purpose of introduction of GST was to bring about the nationally harmonised sales tax replacing the Provincial Sales Tax, and both the governments were entitled to share the revenue.  On Jule1, 2000 the GST was introduced in Australia which replaced the Federal Wholesome Sales Tax System which led to the elimination of numerous state and territory government taxes. About 150 countries have adopted GST as the part of their tax regime.

Indian Scenario

The discussion on GST was brought up in the Union Budget of the year 20006-07, the Finance Minister P.Chidambaram  emphasised the need of the country for the adoption of national level GST, the income derived from which must be shared between both the Central and State Governments. The Joint Working Group was constituted in the year 2007 by the Union Government of India with the consultation of State government to recommend the GST Model. After the unsuccessful attempt of UPA Government to pass the GST, it has been passed by the NDA Government.

Key Features of GST

The Union and State legislature is given the power to make laws pertaining to the GST. The GST Council representing the Union and State Government will ensure the implementation of GST.

• Applicability

GST is to be levied on goods or on provision for services. There are certain goods which are being exempted from the application of GST. These are as follows- Alcohol liquor (for Human Consumption), petroleum products like petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel. The decision is of the GST Council of when to apply GST on these goods.

• Levying of GST

The power to make laws with respect to GST lies with the Parliament and the State Legislature. However, the application of State Law cannot be overridden by any law made by the Parliament. The power to collect as well as levy IGST (Integrated GST) rests with the Union, IGST. The GST Council has the important role to play in implementation of GST.

• Integrated GST

The interstate trade of Goods or Services is to be monitored by the model developed under the GST model known as IGST. It cannot be stated that IGST is a third tax, its only task is monitoring of interstate trade of goods and services as well as to ensure the availability of SGST to the consuming state. The parliament is to formulate a policy for ascertaining the place of supply for determining the place where the supply of Goods or Services will occur and for ascertaining the nature of supply of whether they are interstate or intrastate. The Place of Supply determines the place of import as it is the place where tax revenue accrues. The cross-utilisation of the credit of IGST, CGST and SGST is permitted under the IGST model for the payment of IGST. The sum of CGST and SGST is the tax levied on the interstate sale of goods and services as per the IGST model.

• GST Council

The Union Finance Minister (chairman), the Union Minister of State in charge of Revenues and Finance and the Minister in charge of Finance or Taxation or any other Minister are the parties which will comprise the GST Council. The 3/4th of the majority of the Council will ratify the decision made by the Council. The Council has the power to make recommendations on the following the exempted list of goods or services, the threshold of the turnover for the purpose of applying GST, the rates of the taxes which are to be levied, levy principle, the model pertaining to GST, the decision with regard to IGST division and regarding the locus of supply principle, the provisions applicable to the eight North Indian states.

• Compensation to States

The revenue losses to the States arising out of implementation of GST can be compensated by the parliament through enactment of any law for the same, however, the parliament has to act in consonance with the GST Council. The compensation period is maximum five years.

• Objectives

The elimination of multi layered cascading effect of the taxes which are being levied on the production and distribution cost of goods and services is the ultimate aim of GST. The GDP growth thread higher as the competitiveness of goods and services produced in the nation will increase due to elimination of the vast web of indirect tax which is to be overridden by the GST. All the indirect taxes are to be subsumed into one tax i.e. GST, ensuring the removal of cascading effect of taxes. The one of the important objectives of GST is equality of opportunity and distribution of taxes promoting the principles of a socialist country.

In this blog post, Shambhavi Bundela, a student at New law College Bharati Vidyapeeth, Pune and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses if the Central Excise is applicable to make fixtures   

Introduction

Central Excise duty is an Indirect tax levied on goods manufactured in India. This tax is administered by the Central Government under the power of Entry 84 of the Union List in the Seventh schedule and Article 246 of The Constitution of India. There are two Acts which govern and regulate the Excise law, the first is The Central Excise Act, 1944 in which provides the levy of Central Excise duty and the other is The Central Excise Tariff Act, 1985 where the Rates of duty and specific goods are prescribed under the Schedule I and II. The taxable event under the Central Excise law is ‘manufacture’ and the liability of paying off the duty arises as soon as the goods are manufactured and are cleared from the warehouses. The Central Excise law is administered by the Central Board of Excise and Customs (CBEC). Central Board is a part of the Department of Revenue under the Ministry of Finance, Government of India. It deals with the tasks of formulation of policy concerning levy and collection of Customs & Central Excise duties and Service Tax.  The country is divided into 23 zones and chief Commissioner of Central Excise heads each zone. For Small Scale industry the concept of Tax clinics has been introduced educating small manufacturers about their legal responsibilities and guiding them in conduct of tax.

Registration

For the administration of the Central Excise manufacturers of excisable goods or any person who deals with excisable goods with some exceptions, are required to get the premises registered with the Central Excise department before commencing the business. Manufacturing is anything wherein any entity changes its shape and form and has marketability and the process of such process is Manufacture and also includes packing and labeling. As per section 6 of The Central Excise Act, 1944 any person who is engaged in production or manufacture of any process of production or manufacture of any specific goods included in the (the first schedule and the second schedule)  to the central Excise Tariff Act,1985 , or The wholesale purchase sale or the storage of any specific goods in the (First schedule and the second schedule) to the Central Excise Tariff Act,1985  shall get himself registered with the proper officer in such manner as prescribed.

The legal provisions contained in Rule 9 of The Central Excise Rules, 2002 also governs the scheme of registration and following category of persons are required to register with jurisdiction over his place of business/factory:

1. Every manufacturer of excisable goods on which duty is levied
2. First and second stage dealers
3. Person holding warehouses for storing non-duty paid goods
4. Persons obtaining excisable goods for end use
5. Exporter-manufacturers Which have interaction with domestic economy
6. Persons who get yarns ,fabrics, readymade garments on job work( not required anymore)

Separate registration is required in respect of separate premises and for each depot, godown etc. Registration certificate maybe granted to the minors also provided that they have legal guardians. The application for registration should be submitted in Form A1 and, Form A2 (Garment dealers) or Form A3 (tobacco dealers) to the jurisdictional Divisional office and the Registration along with constitutional document of business, PAN card no. , account details etc. Non registration can lead to confiscation of goods and penalty up to INR10, 000.

Assessment and Payment

In 1996, the self-assessment system was introduced, the assessee himself assesses his tax return and the Department scrutinizes it or conducts selective audit to ascertain correctness of the duty paid. Rule 4 provides that producer or manufacturer shall pay duty leviable in such goods in the manner provided under the Rule 8 or under any other law. No Excisable goods shall be removed from the place where they are manufactured or from the warehouse until the duty is paid off and before removal of such excisable goods the duty has to be assessed on the goods.

As per rule 6, assessee or the producer is himself required to determine duty liability at the time of removal of goods. Thus he shall apply correct classification and value on the quantities and indicate the same in invoice and also to check the return for the month and submit to the Range office having jurisdiction. First, for determining the rate of duty, classification is required under the First schedule to Central Excise Tariff Act, 1985. Some goods are subjected to ‘special duty of excise’ thus; reference to second schedule shall also be made. Second, value is to be determined where rate of duty is dependent on value in accordance with Central Excise Act, 1944. Also, total value is determined by multiplying unit value with total quantity (where duty is charged at specific rate).

Records and Returns

Records are necessary to be maintained in course of any business activity. The records determine the tax liability of the assessee. The government relies on the private records of the assessee for more simplification and every assessee shall maintain private records. This private record shall be maintained on a daily basis indicating particulars of the goods manufactured, quantity produced or manufactured, inventory, quantity removed, assessable value of the goods, amount of duty to be paid, and amount which is already paid. The duplicate of such records is required to be furnished to the Range officer for accounting of transactions.

From October 2014 all returns must he submitted electronically however manual payment can be done on case to case basis, with reasons recorded in writing.  There shall be monthly return for production and removal of goods and CENVANT Credit in Form ER-1 within 10 days on next month.  Whereas manufacturers of processed yarn, readymade garments and unprocessed fabrics avail exemption and shall file quarterly return in Form ER-3 within 20 days of next month. In case of return related to principal input there shall be monthly return in Form ER-6 and annual return in Form ER-5 by 30th April every year.

What are fixtures? Does Central Excise Apply On Its Making?

The word ‘fixtures’ is not well defined and has no legal definition. Fixture is a piece of equipment or any physical property or furniture which is fixed in a position in a real property. Fixtures include Electric sockets, light fixtures, plumbing installation etc. and are treated as part of real property. These are fixed or attached to a wall or building or any other property and even if you can easily remove it, the method used to attach it make it a fixture. Fixtures are fixed or attached with the intention to make the item a permanent attachment.

The Central Excise and Tariff Act, 1985 in the First schedule provides goods in which excise duty are levied. Such goods are mentioned under different categories and classifications with their tariff item no. In separate chapters the goods which are fixtures are also thus categories in different heads which are:

1. Tariff item 83025000 – Hat-racks, Hat-pegs, brackets and similar fixtures at Rate of duty 12.5%
2. Tariff item 84663020 – Jigs and fixtures; at Rate of duty 12.5%
3. Miscellaneous Manufactured Articles under Chapter 94 which are: Furniture, bedding, mattresses support, Metal furniture used in offices of steel, Wooden furniture used in offices or kitchen, lamps and lightning fitting , chandeliers, Wall lamps, solar lanterns or lamp, Seats used for Aircraft, motor vehicle, Prefabricated housing materials,   at 12.5%

Under Notification No. 12/2015-Central Excise Issued by the Central board the rate duty in manufacture of inputs of LED lights ,LED fixtures etc. has been reduced. It has reduced to a Rate of 6% from an earlier Rate of 12%. Thus, through notifications issued the rate of duty can be lowered down or even be exempted of the Excise duty.

Conclusion

A Manufacturer or Factory owners who deals with making of ‘fixtures’ which includes process incidental or ancillary to manufacture , processes specified in the First schedule, or packing and labeling process of goods shall be obliged to the payment of Excise duty at the time of removal of goods from the place of manufacture or warehouse. The manufacture shall fulfill the compliance requirements regarding the Compulsory Registration and Excise registration is obtained on immediately upon submitting the application. Compliance is also required in maintenance of Records and Accounts of financial statements and transactions. No independent audit is required under the Central Excise Act; however, they must provide the access. An Invoice signed by the owner is necessary for removal of goods from the factory. Filling of returns shall be made monthly electronically.

The Tariff 2016-17 classifies and such fixtures are classified which clearly shows that fixtures are excisable on their respective Rate of duty. Fixtures are nothing but property permanently attached to the real property. Under the tariff different categories of fixtures are mentioned which are excisable, and the owner who is dealing with manufacturing of such fixtures shall complete the compliances and pay off the Rate of duty on the respective classification. Fixtures include furniture, electric sockets, and other physical property attached or hanged on a real property.

In this blog post, Nikita Jain, an Associate at SK Constellation Blu Advisory Private Limited and pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses the e-filing of Income Tax Returns.  

The process of electronically filing Income tax returns through the internet is known as e-Filing.

E-Filing of Returns/Forms is mandatory for:

• Any assessee having total income of Rs.5 Lakhs and above for from AY 2013-14 and subsequent Assessment Years.
• Individual/ HUF, being resident, having assets located outside India from AY 2012-13 and subsequent Assessment Years.
• An assessee required to furnish a report of audit specified under sections 10(23C)(iv), 10(23C)(v),10(23C)(vi) ,10(23C)(via) , 10A, 12A(1)(b), 44AB, 80-IA, 80-IB, 80-IC, 80-ID, 80JJAA, 80LA, 92E or 115JB of the Act, shall furnish the said report of audit and the return of Income electronically from AY 2013-14 and subsequent Assessment Years.
• An assessee required to give a notice under Section 11(2)(a) to the Assessing Officer from AY 2014-15 and subsequent Assessment Years.
• All companies.
• Firm (to whom provisions of section 44AB is not applicable), AOP, BOI, Artificial Juridical Person , Co-operative Society and Local Authority required to file ITR 5 from AY 2014-15 and subsequent Assessment Years.
• An assessee required to furnish return u/s 139 (4B) in ITR 7.
• A resident who has signing authority in any account located outside India.
• A person who claims relief under sections 90 or 90A or deduction under section 91.

Types of E-filing:

Option 1 – Use Digital Signature Certificate (DSC) to e-File. There is no further action needed, if filed with a DSC.

Option 2 – E-File without Digital Signature Certificate. In this case an ITR-V Form is generated. The Form should be printed, signed and submitted to CPC, Bangalore using Ordinary Post or Speed Post ONLY within 120 days from the date of e-Filing. There is no further action needed, if ITR-V Form is submitted

Option 3 – E-File the Income Tax Return through an e-Return Intermediary (ERI) with or without Digital Signature Certificate (DSC).

E-FILING PROCESS

1. Creation of User ID & Password
2. Income Tax Return preparation utility
3. Selection of appropriate ITR form
4. Pre-requisites for filling of e-forms
5. Import of data from 26AS
6. Validation of files
7. Generation of XML file
8. Uploading of Income Tax Returns
9. Use of digital signatures
10. Acknowledgement receipt
11. Check CPC processing status

CREATION OF USER ID & PASSWORD

For e-filing of Income Tax Return an assessee has to get himself registered on the official website of the Income Tax Department.

Procedure for Registration

• Go to the portal – www.incometaxindiaefiling.gov.in
• Click on Register as new user.
• Mention PAN, as that would be the User – ID.
• If the PAN is not registered a new page will open, or else a message will appear “PAN is already registered”.
• The assessee has to submit his name, father’s name, date of birth, e-mail id, phone no & password of his own choice.
• Opt one secret question out of four questions given & provide answer to the same.
• Fill the verification code give & click on register.
• After successful registration the user will receive an e-mail on the e-mail id provided at the time of registration wherein a link would be given which is to be activated.
• Once the link is activated, the user would be authorized to use all the services offered by Income Tax Department and can e-file his retur.

Precautions

• Name, father’s name, date of birth should match the details available with the Income Tax Department i.e. given in the PAN card.
• Surname is mandatory.
• In case of assessees other than individuals, name has to be mentioned in surname field.
• Furnishing of proper e-mail id is important as all correspondence in future will be sent on the registered e-mail id.

INCOME TAX RETURN PREPARATION UTILITY

• Go to the portal – www.incometaxindiaefiling.gov.in
• Select ITR forms – AY 2016-2017.
• Then select the assessee for whom the ITR is being filed.

SELECTION OF APPROPRIATE ITR FORM

Selection of appropriate ITR Form is necessary for filing of Income Tax Return.

Below are the types of ITR Forms.

PRE-REQUISITE FOR FILING OF FORMS

• Enable macros in excel worksheet before filling the ITR. – to activate the buttons on the right side of the excel utility.
• Filling of excel utility.

• Go through instructions before filling forms.
• Do not Ctrl+X or Cut Paste while data entry.
• Fill all green colored fields
• Fill all mandatory fields which are marked as red
• Before filling details of TDS/Advance Tax/Self-assessment tax, verify/import the details from Form 26AS.

IMPORT DATA FROM 26AS

• Login at www.incometaxindiaefiling.gov.in by providing the user-id & password of the assessee.
• Go to “My Account”. The click on “View Tax Credit Statement (Form 26AS)” and provide the necessary details as required therein. Then click on “Submit”.
• A new window shall appear, click on “Confirm”, then form 26AS appears.
• Copy the data of form 26AS from the site and paste on the normal excel sheet.
• Retain the columns containing the data mentioned below and delete other rows & columns

• Copy the format cells (green color) from the TDS schedule of excel utility and paste on the normal excel sheet.
• Using Format Painter copy the format of TDS schedule of excel utility on all the columns of the normal excel sheet.
• Insert requisite number of rows in the TDS schedule in excel utility.
• Paste the TDS details from the normal excel sheet to the TDS schedule of the excel utility.

VALIDATION OF FILES

• After filing the appropriate income tax return, click on “Validate” button, shown on each & every sheet of income tax return.

• This helps in identifying the error in the sheet, if any. If there is no error in the sheet then the windows appears as “Sheet is OK”.

• The same procedure is to be followed in respect of each and every sheet.

• Do not use special characters as they will not be accepted  by the income tax return software.

GENERATION OF XML FILE

• After all required schedules have been filled & validated, click on “Generate XML file” which will recheck all the sheets and show final validation sheet.
• After the generation of XML, the next option which appears is for saving the XML.
• For saving the XML, click on “Save XML” and save XML in the same folder in which excel return is saved. The saved file will carry a name ending with PAN followed by the file extension. The same may be changed by the assessee.

UPLOADING OF INCOME TAX RETURN

The validated XML file generated is ready for uploading with Income Tax Department by adopting the following procedure:

• Login the website of Income Tax Department with the user-id & password already created.
• Click on “Submit Return” on the left panel & select the assessment year for which return is to be filed.
• Select the ITR form to be filed.
• Select the option of filing the ITR form with or without digital signature. Click on “Next”.
• Provide the oath of validated XML file by clicking on “Choose File”.
• If the return is to be filed without digital signatures press “Upload” and take print of ITR-V. Send across the duly signed.
• If return is to be filed with digital signature, follow the below procedure:

• Update the digital signature with the Department.
• Signing the Income Tax Return form and upload.

USE OF DIGITAL SIGNATURES

Following Persons have to mandatorly use of Digital Signature:

• Companies

• Individuals/Firms/HUFs liable to tax audit u/s 44AB of Income Tax Act, 1961.

ACKNOWLEDGEMENT RECEIPT

After successful uploading of Income Tax Return, an acknowledgement receipt is generated. This acknowledgement receipt is known as “ITR-V”.

If return is filed with digital signature

If the return is electronically furnished with digital signature then ITR-V is not required to be furnished to the Income Tax Department. The ITR-V generated after uploading the return is to be treated as receipt of filing of return. The date of filing of return will be the same as mentioned in the ITR-V.

If return is filed without digital signature

If the return is electronically furnished without digital signature then ITR-V is required to be furnished to the Income Tax Department as verification of filing the Income Tax Return. This ITR-V has to be filed within 120 days of transmitting the data electronically. The date of filing of return will be the same as mentioned in ITR –V if the same is received by the CPC within specified time limit. In case the ITR-V is not received by the CPC within specified time limit then the return shall be treated as null & void.

Do’s & Don’ts for printing & submitting of ITR-V

• ITR-V should be legible & signed in original.
• ITR-V must be sent to the CPC within specified time limit.
• The ITR-V to be sent to Income Tax Department, CPC Bengaluru by ordinary/speed post.
• Courier & other means should not be adopted.

Track ITR-V Status

ITR-V receipt status at CPC, Bengaluru can be checked under “Services” menu.

CHECK CPC PROCESSING STATUS

Processing status of ITR-V at CPC Bengaluru can be checked under “Services” menu.

In this blog post, Neha Susan Rajan, a student pursuing her BA LLB (Hons.) at School of Law, Christ University and a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses the taxation methodology of slump sale.  

“Different colours of the rainbow may appear as separate entities but in reality, the rainbow is a single phenomenon; this is a case of slump sale only.”

Introduction

The right to levy tax is constitutionally protected right of the State under Ar.265. The tax regime is well structured and decentralised. This right can be exercised by Central Government, State Government and Local authorities at the grass root level. Taxes are divided into direct tax and indirect taxes. Direct taxes are those taxes where the burden of paying tax is directly borne by tax payer. These include Income Tax and Wealth tax. Indirect taxes include customs, Goods and services tax, etc.

Artificial person like Company is subjected to the taxation. Indian Corporations are taxed on their worldwide income while foreign companies are taxed on income that arises from operations in India.  Taxes charged on a corporation include Minimum Alternative Tax (MAT), Fringe Benefit Tax (FBT), Securities Transaction Tax (STT), Dividend Distribution Tax (DDT) and Wealth Tax. Even sale of an undertaking or an investment can be taxed. This is known as Capital Gain Tax. This can be house, ranch, cattle house and family business. It is a voluntary tax since it is only payable when asset is sold. This article attempts to understand the taxation issues that arise through a sale of undertaking.

What Is Slump Sale

Slump sale means sale of undertaking for a lump sum without assigning any particular value to assets and liabilities. In order to make it a slump sale, it should maintain following conditions (S.2(42 C)).

1. There must be a sale. This means there should be transfer of assets and it should be for a consideration in cash or kind.
2. ‘Undertaking’ shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. (S.180). This should be approved by shareholders by special majority. Furthermore, the articles of association and memorandum of association of the transferor company must contain provisions to support it.
3. Lump sum consideration means it should not be done in instalments but in one time.
4. Individual values must not be assigned to assets and liabilities; net worth of the assets is taken into consideration.

Assignment of the values can be done in exceptional cases. They include:

1. Payment of stamp fees
2. Registration fees
3. Any other taxes

The slump sale transaction mainly confers three advantages- first, it enables improvement of operation of weaker business; secondly, elimination of negative synergy and facilitate strategic investment; thirdly, to seek tax and regulatory benefits.

Meaning of undertaking

“Undertaking” in common parlance means an “enterprise”, “venture”, and “engagement“. It can as well mean “the act of one who undertakes or engages in a project or business”. The word “business”means “some real, substantial and systematic or organised course of activity or conduct with a set purpose”. Hence the words “industrial undertaking” in the Income Tax Act, 1961 means “any venture or enterprise which a person undertakes to do and which has relation to some industry or has some industrial consequences”. In 2015, Kolkata Tax Appellate Tribunal held that transfer of specific assets of an undertaking does not constitute to be a Slump Sale merely on the ground being a transfer of going concern. It is quintessential to determine whether the business is being transferred along with all necessary assets and liabilities that constitute an integral part of the undertaking.

The word undertaking is distinct from its components. “Plant, machinery and dead stockare are individual items of an Undertaking. Business Undertaking not only includes tangible items but also comprise intangible items like, goodwill, manpower, tenancy rights and value of banking licence”.

Lump sum consideration

The slump sum price must not be paid in instalments but it should be one-time payment.The lump-sum consideration received by the seller in a slump sale transaction is a capital receipt under S.50B of the Income Tax Act,1961 not business receipt under S.25.  Hence, the amount received cannot be treated as compensation for the discontinuation of business.

Sale means transfer of assets

In CIT v Bharat Bijlee, there was no monetary consideration for transfer of undertaking but transferee issued preferential shares and bonds to the transferor. The Bombay High Court held that it was a case of exchange not sale. Hence, it can be only called a transaction under S.2 (42C) when the transaction shows the true nature of the sale.

Slump Sale And Income Tax Act

Under the Income tax Act, 1961, the slump sale is defined under S.2 (42 C).  This is elaborately discussed under the Capital Gains Tax i.e, S. 50 B. Prior to the introduction of this provision, the judiciary was of the view that that “transfer of an undertaking for a slump consideration did not trigger capital gains tax as the cost of acquisition of an undertaking is not capable of being quantified”. Consequently, the Income Tax Act was amended in 2000 to enable levy of tax on transaction involving slump sale. This became effective from April 1 2000. This intends to recognise demerger, slump sale under the concept of capital gains and rationalise the existing provisions of the merger.

S.50B determines the computational mechanism of capital gains. Gains arising on slump sale are chargeable as long term capital gains if the undertaking is owned and held by the assessee for more than 36 months preceding the date of transfer. Else, gain is chargeable as short term capital gains. Every assessee should furnish the return of income, a report of an accountant indicating the computation of the net worth of the undertaking or division and certify that the net worth of the undertaking or division has been correctly arrived at in accordance with the provisions of this section.

Computation of the Net Worth

The Sick Industrial Companies (Special Provision) Act, 1985 defines “net worth” as “the sum of total paid up capital and free reserve”. The SEBI (Disclosure and Investor Protection) [DIP] Guidelines, defines “net worth” means “aggregate of value of the paid up equity capital and free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses and deferred expenditure not written off (including miscellaneous expenses not written of) as per the audited balance sheet”.

Explanation 1 to S.50 B defines “Net worth” as the aggregate value of total assets of the undertaking or division minus the value of liabilities of such undertaking or division as appearing in its books of accounts. The “aggregate value of the assets” include in the case of depreciable assets, the written down value of the block of assets determined in accordance with S. 43 (6)(c)(i); in the case of capital assets where the deduction allowable for expenditure under section 35AD, it is NIL and  in the case of other assets, the book value of such assets.

Itemized Sale vs. Slump Sale

The itemized sale is different from slump sale. In itemized sale, the income from the sale of individual assets is taxed separately. Consequently, income from the sale of assets in the form of “stock in trade” will be taxed as business income, and the sale of capital assets is taxable as capital gains. 

In CIT v. Mugneeram Bangur& Co, the firm had sold the business as a going concern along with its goodwill and all stock in trade, etc., to a company for a lump sum price. The Supreme Court held that the sale was of a whole concern and no part of the price paid was attributable to the cost of land and hence, taxable.

Slump Sale and Indirect Tax Concerns

As far as the indirect taxes like sales tax, value added taxes are concerned, when the undertaking is sold as going concern, it does not become to these taxes such that it does not qualify to be a sale of movable goods. In the case of ‘The Deputy Commissioner of Sales Tax (Law) v. DatPathe’ , the Court have held that the transfer of one unit/ business as a going concern having separately identifiable assets, liabilities, income and expenditure would be considered as transfer of business as a ‘going concern’ and accordingly not attract any VAT or sales tax. VAT is chargeable only when the transferor close downs the business by the effect of sale of undertaking. This is left to the discretion of the State to tax VAT.

Impact of Negative Net Worth on Slump Sale

In SRM Energy Ltd v. DCIT (2015), the Mumbai Tribunal held that the negative value of the   net worth must be taken into the consideration for the purpose of the computation of the capital gains. It can be a negative value but not zero.

Slump Sale and Stamp Duty

Under the Indian Stamp Act, the stamp duty is imposed on the transfer of the immovable property.  This Act does not talk about anything specific to slump sale. Explanation 2 to S.2 (42 C) of the Income tax Act does not bar to assign individual valuation of assets for the purpose of determining the value of stamp duty.

The buildings and lands are considered to be immovable property while the debate lies on the question whether the installations and machinery include within the ambit of immovable property. In the case of ‘Duncans Industries Ltd. v. State of U.P. and Ors’, the Court held that unless the machinery could be removed from seller’s plant to new location, it cannot be considered as sale of goods. Hence, the value of the machinery is needed to be determined in the sale deed for immovable property.

Conclusion                  

In order to constitute a slump sale as per the statutory provision the transaction should reveal the true nature of the sale indicating a consideration for the same and tax is chargeable as long-term or short-term capital gain, as the case maybe, under section 50B of the Income Tax Act by computing the net worth of the undertaking. It is clear that  a slump sale of even a part of an undertaking is taxable under income tax whereas the state cannot enforce indirect taxation such as VAT unless the transferor close downs the business by the effect of sale of undertaking. Since slump sale is a lucrative way for a business entity to transfer an undertaking, it is advisable for the parties to negotiate and commercially agree the cost burden of each party owing the complications involved in the different levels of determination in taxation.

In this blog post, Meghana Dhandhania, a fourth-year law student at Pravin Gandhi College, Mumbai and a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses how a Minimum Alternate Tax or MAT is applicable to a multi-national company.

In this blog post, Neeli M. Sandesara, a student pursuing her BLS LLB from Mumbai University and a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses the process of deduction of TDS on a software transaction.

INTRODUCTION

Taxation on software transaction is hotly debated today. Due to the development in the software, its buying and selling i.e. the software transaction has increased tremendously. If I have to deal with the topic of software transactions, taxation is something which I must deal with first as it forms the most integral part of any transaction.

The term ‘buying’ and ‘selling’ are not correct conceptually but for a better understanding of my readers I have used those terms. When I deal with this concept in toto in my further research paper, I will use the terms ‘licensor’ for the seller and ‘licensee’ for the purchaser. The sale of these types of software is not like an ordinary sale of goods, it is more of a ‘licence’ transaction. The payment is called the ‘royalty’ of using a software license and not just the payment per se. When the developer or the service provider sells this product and not just provides a license to it, it is then the called as ‘professional charges’ TDS is deducted at the stage of making payment i.e. when the invoice is raised by the developer, though he will raise the invoice for the total amount but the software developer or the software service provider will receive the amount minus TDS.

RESEARCH OBJECTIVE

Research Statement- How to deduct TDS on software transaction.

Specific Objective– To put forth mechanism of calculation of TDS on the software  transaction and the percentage of it as per the Income Tax Act, 1961.

KINDS OF SERVICES PROVIDED

Due to the demand of various kinds of software services, the growth in this field is inevitable. Everyday there is some or the other kind of a innovation/development which is introduced in the market.

    I have enumerated some very commonly used software along with a short explanation to it and they are as follows-

1. Perpetual License– the perpetual licensor will allow the customer to use the licence  indefinitely.

• Software as a Service (‘SaaS’)- this is kind of a software and a delivery model which is licensed on a subscription basis.

• Annual Maintenance Contract of Software (AMCs)-  Its an agreement between the customers and contractors(companies) wherein the contractors are appointed to look into the maintenance of the computer system of its customer. It is generally for a term of one year.

Some other widely used services are – Online software purchase from foreign service provider, hosting service, internet service, software architecture services, software testing services and software project management services provided by Indian service provider and by foreign service provider.

PROVISIONS RELATING TO TDS ON THE INCOME TAX ACT, 1961(hereinafter referred to as the ‘Act’)

Section 194C of the Act which deals with the TDS deducted on contracts (which also includes service contracts).

This section will be dealt while calculating TDS on maintenance of not so technical services. In order to know more about technical services we now refer to S. 194J of the Act.

Section 194J deals with TDS on technical maintenance services (which will include ‘AMCs’)

For the purpose of this section, it is very vital for us to understand and know the difference between the ‘professional fees’ and ‘royalty’. When a developer sells his software outright, he will not claim royalty from it but just the professional fees, but when a customer obtains a licence to use software, the developer will get his due share of royalty.

DTAA with various countries have defined royalty in wider terms which even includes the consultancy services pertaining to the technical project. I have incorporated the pointers for lucid under understanding.

Residence State                                                                

• May tax                                                                       

• Included in the taxable income

           Source State

• May not tax

• Tax not allowed

As far as technical fees is concerned, there is no separate Article in OECD Model and UN Model for technical fees. However, we can find FTS (Fees for Technical Services) under Article 7 of the US Model Convention.  Terms like ‘Technical Services’, ‘Managerial Services’ and ‘Consultancy Services haven’t been given any interpretation by the Indian Courts and have obtained meaning from various foreign courts and dictionaries.

As per Section 195 of the Act which deals with payment of royalties and technical fees to  non-residents.

As regards transfer of payment to a non-resident in consideration of royalty or technical services received, Section 195 of the IT Act provides that –

Any person responsible for paying to a non-resident including a foreign company any sum (other than interest on securities and dividends) which is chargeable to tax in India is required to deduct tax at source on such income at the time of payment.

Provisions of Double Taxation Avoidance Agreement (DTAA) overrule domestic tax laws of contracting states. Difference may arise on account of Tax Rates and Scope of Taxability.

As per the circular dated 13 February 2013, payment by a person (hereafter referred to as the transferee) for acquisition of software from another person, being a resident, (hereafter referred to as the transferor), where-

(i)        the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification,

(ii)       tax has been deducted-

            (a) under section 194J on payment for any previous transfer of such software; or

            (b) under section 195 on payment for any previous transfer of such software from a non-resident, and

(iii)      the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor.

The Central Government hereby notifies that no deduction of tax shall be made on the abovementioned payment under of the Act.

CONCLUSION

I would like to conclude my research by summing up on certain aspects. Software transactions are mainly dealt under S.194C, 194J and 195. With this I have even stated as to how TDS varies when a transaction is done overseas.

Concluding remarks:

1. Need to define certain concepts such as ‘FTS’ for the sake of clarity and better interpretation. General dictionary meaning does not fetch much weightage; and
2. Need to align with the internationally accepted taxation principles

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In this blog post, Manisha Nayak, a fourth-year BLS LLB student from Government Law College and pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses advance tax.

What is advance tax?

“Advance Tax” name itself suggests the tax that is to be paid up in advance. Advance tax means income tax should be paid in advance instead of lump sum payment at year end. It is also known as “pay as you earn tax”. These payments have to be made in instalments as per due dates provided by the income tax department.

Who should pay the advance tax?

Not every citizen of India has to pay the advance tax. It is applicable to certain citizens of India with some conditions. Advance tax applies to all taxpayers, salaried, freelancers, and businessmen. Senior citizens, who are 60 years or older, and do not run a business, are exempt from paying advance tax. So if the total tax liability of a person is INR 10,000 or more in a financial year then he has to pay advance tax.

Change in the Advance Tax Scheme

Till the fiscal year of 2015-16, the first advance tax payment date for individuals used to be September 15th but Budget 2016 made the first instalment payable 3 months earlier i.e. on June 15th 2016 fiscal onwards. The taxpayers who are liable to pay advance tax, as per the new amendment have to pay the first instalment by June 15 else pay 1% simple interest per month on late payment.

This has significantly increased the income tax compliance burden on individual taxpayers. As per amendments made in Budget 2016, individuals (except for exempted categories) will now have to estimate their income for the full financial year as early as June 15, compute the income tax that would be payable on that income and pay 15% of that or else get ready to forfeit interest on late payment at a taut rate of 1% simple interest per month. 

Taxpayers who opt for presumptive scheme where business income is assumed at 8% of turnover were exempted from advance tax for FY 2014-15 and FY 2015-16. Nevertheless, starting FY 2016-17, such taxpayers have to pay whole amount of their advance tax in one installment on or before 15th March. Presumptive scheme is covered under section 44AD and 44AE. Starting FY 2016-17 businesses with turnover of INR 2 crores or less can opt for this scheme. This scheme has been extended to professionals such as doctors, lawyers, architects etc. starting FY 2016-17, if their receipts are INR 50 lakhs or less.

Computation of the Advance Tax

The Advance Tax is to be calculated as per the Section 209 of the Income Tax Act, 1961.

Section 209 lays out different conditions to be followed to compute the advance tax for different kind of persons.

Instalments of advance tax and due dates

As per Section 211(1) Advance tax on the current income calculated in the manner laid down in section 209 shall be payable by—

1. all the assessees, other than the assessee referred to in clause (b), who are liable to pay the same, in four instalments during each financial year and the due date of each instalment and the amount of such instalment shall be as specified in the Table below:

Due date for Advance Tax payment in case of assessee (other than companies)

Due date for advance payment in case of companies

Impact of proposed change

For those individuals whose sole or main source of income is salary, the impact of this change would be slight or nil because most of their tax payable would be deducted as Tax Deducted at Source (TDS) by the employer. It is the employer’s responsibility to deduct and deposit tax on the salary paid to its employees within the time limits prescribed by the Income Tax Rules. In case an employee has a little non-salary income such as taxable interest on bank savings account etc. then this can be declared to the employer with a request to add it to salary income computation and deduct tax on this additional income also. In this way, the employee need not bother about paying advance tax on his own. However, in case the salaried individual wants to inform their employers about their ‘other income’ and get the advance tax paid via TDS they would still have to do the exercise of computing estimated income prior to the four advance tax instalment dates.

However, taxpayers with substantial income other than salary (which normally employees do not prefer to disclose to employer) will definitely be impacted as they would be required to pay advance tax on this other income (not declared to employer). For taxpayers who calculate and pay advance tax based on estimated income the adverse impact of this change would increase with increase in variation (quantum as well as degree) of actual income from estimated and vice versa. For tax payers who are unable to take out time from their busy schedules (a substantial number fall in this category) to calculate and pay advance tax, the adverse impact would be in the form of significant increase in interest payable on the deferment of advance tax payment.

Practically a majority of people find it very tedious to calculate and pay advance tax therefore even earlier a large number skipped the first or the first two advance tax payment dates and paid only by the third, therefore advancing the payment schedule by one quarter will increase compliance burden for them as well as the payment on deferment of advance tax. Individuals also have to bear the unnecessary burden of additional professional fee if they have engaged a professional (chartered accountant) and he increases the fee due to extra compliance.

What if we do not Pay Advance Tax?

If a person has to pay advance tax and If he fails to pay the Advance Tax or, if he has paid less than the stipulated tax, then he would be penalized and would be liable to pay extra under Sections 234A, 234B, 234C of the Income Tax Act. So there is no escaping Tax.

The interest is calculated at 1% simple interest per month on the defaulted amount for three months. The interest penalty would continue up to the next deadline. If even after the last deadline of 15 March, the tax is not paid, then the 1% would be on the defaulted amount for a month, until the tax is fully paid.

Sections triggered under penalty of the Income Tax Act, 1961

Under section 234A, the liability arises only when the return is filed after the due date which for AY 2016-17 is 5 Aug. Ex: Due Date for current year, which is Assessment Year 2013-2014 or Financial Year 2012-2013 is 5 Aug 2016.

Under section 234B of the Income Tax Act, 1961

Under Section 234C of the Income Tax Act, 1961 (In case of a non-corporate assessee)