A dive into five contentious issues contained in Finance Bill, 2021

Govt may have to respond to concerns over equalisation levy, exporters issues, definition of the term 'liable to tax' and taxability of interest on employees' EPF contributions exceeding Rs 2.5 lakh

Two important stages of the Budgetary process will be completed in the post-recess Budget session of Parliament which resumed on Monday -- passage of the Appropriation Bill and the Finance Bill, 2021. 

The government may have to respond to some of the criticisms on certain provisions of the Finance Bill. These mostly relate to expanding the scope of equalisation levy (EL), definition of 'liable to tax', removing IGST route to claim refunds by exporters, confiscation of goods meant for exports if goods are not categorised properly for remission and refund purposes. Some may also seek clarity on taxing EPF contribution of employees beyond Rs 2.5 lakh a year. 

Equalisation levy

Because of the amendments proposed in the Bill, the whole consideration for goods and services will be subject to EL even if the e-commerce operator is not the owner of goods and services. 

"This would pose a challenge as the liability on account of EL amount could be very high. Companies would have to make the difficult decision on whether or not to pass on the entire cost to the customer," said Amit Maheshwari, tax partner at AKM Global, a consulting firm. 

The amendments were proposed by finance minister Nirmala Sitharaman in the Bill after clarification was sought by various stakeholders on several aspects of the EL provisions, as amended by the Finance Act, 2020. 

The Finance Act, 2020 expanded the scope of EL to cover “e-commerce supplies or services”. EL covers a range of digital transactions including business-to-business (B2B) transactions, business-to-consumer (B2C) transactions, e-commerce marketplaces and digital services.

Effective April 1, 2020, EL is chargeable at two per cent on the consideration received or receivable by non-residents who operate digital businesses targeting, among others, the India market. EL exists as a separate levy alongside the Goods and Services Tax (GST) on cross-border transactions and hence it is an incremental cost of doing business, says a note by EY.

Maheshwari said since the clarification is applicable retrospectively, from April 1, 2020, the operator may have collected EL only on the commission amount during this period and this could pose a practical challenge as EL cannot be collected retrospectively from customers.

The amendment says scope of the terms “online sale of goods” and “online provision of services” will cover any of the following activities if undertaken online: acceptance of an offer for sale, placing a purchase order, acceptance of a purchase order, payment of the consideration, the supply of goods or provision of services, partly or wholly.

A note by EY said this proposed amendment may broaden the applicability of EL provisions even to physical, offline supplies of goods and services if any one of the above activities has taken place online.

Maheshwari said amendments still do not clarify whether financial service transactions, B2B deals, non-profit businesses such as education and healthcare, and inter-company transactions fall within the scope of EL.

The amendments also say consideration such as royalty and fees for technical services, which is taxable under the Income Tax Act read with Double Tax Avoidance Agreements (DTAAs), will not be subject to EL. Thus, royalty and FTS income will continue to be charged at 10 per cent (plus applicable surcharge and cess) on a gross basis and will not be chargeable to EL, says an EY note.

Maheshwari said this is all the more important now. "One needs to be mindful that payments of such nature, if not covered under DTAAs could be subject to EL. Even a single activity like acceptance of offer can lead to the whole of the transaction subject to EL. It is also not clarified the sale of what kind of data will attract EL in case of transaction between two non-residents for ‘sale of data’."

In fact, the recent Supreme Court verdict refrains the income tax department from levying tax on the amount paid by Indian companies to foreign companies for purchase of software. Experts say that the government may now impose EL on these amounts. 

Liable to tax:

The Bill has proposed to add the definition of 'liable to tax' in domestic direct tax laws. As per the definition, the term ‘liable to tax’, “in relation to a person, means that there is a liability of tax on such person under any law for the time being in force in any country, and shall include a case where subsequent to imposition of tax liability, an exemption has been provided”.

Prior to the introduction of the proposed definition, various distinguishing rulings of the Supreme Court and the Authority of Advance Rulings (AAR) were applied to draw inference of the term 'liable to tax'. The Supreme Court, in the case of Union of India vs Azadi Bachao Andolan, held that it was a fallacious premise that liability to taxation is the same as payment of tax. Interestingly, however, the AAR in the case of Abdul Razak noted the difference between the treaties UAE had signed with India and those it had signed with France, Germany and Canada to highlight that it was only in the India-UAE tax treaty that the requirement of 'liable to tax' was to be satisfied to take treaty benefit.

The term ‘liable to tax’ finds mention in domestic law under provisions for untaxed foreign income of Indian citizens and the income of pension funds.  Interestingly, both provisions were inserted by the Finance Act, 2020. The stated intention behind the new definition is to clarify its meaning with respect to both the domestic law provisions and tax treaties. 

However, the new definition may be interpreted to require an initial imposition of tax so as to exclude pension funds etc which are not required to pay tax in the first place. 

Rakesh Nangia, chairman of Nangia Andersen India, said the reason behind the new proposal was that some individuals arranged their affairs in such a manner as to escape taxation in any country or jurisdiction during a year. These individuals claimed to be residents of a tax haven due to the presence of the phrase 'liable to tax by reason of his domicile, residence, place of management or any other criterion of similar nature' in the tax treaties and contended a potential future tax liability in the country, thereby avoiding taxation in India, he explained. 

Now that the definition of the term 'liable to tax' is proposed to be introduced in the Income Tax Act, such individuals may get covered under the 'deemed residency' provisions in India and accordingly be classified as residents and not 'ordinarily residents' in India, Nangia said. 

"It shall now have to be established that there is no 'liability to tax' under laws of another country so as to escape residency in india," he said. 

Concerns of exporters:

Exporters are concerned over two provisions in the Bill which they say would make it difficult for them to seek refunds.

The two proposed provisions are: an amendment in the Section 16(3) of the Integrated Goods and Services Tax (IGST) Act and insertion of rule under the Customs Act for empowering authorities to confiscate goods which were misdeclared for the purpose of refunds and remission.

The amendment to section 16(3) of the IGST Act would take away payment of taxes through IGST credit and retain only payment of these taxes and claiming refunds through input tax credit (ITC).

Ajay Sahai, CEO and director general of exporters' body FIEO, explained that for IGST refund, there is no need for any application, as the shipping bill served as a document for application and if GST returns were in place, then the refund process was seamless.

He said most exporters avail IGST refunds, instead of ITC refund. "That is because the system itself is much more efficient than the ITC system," Sahai said

Sahai explained that if the exporter has to pay Rs 1,20,000 as taxes and has IGST credit of Rs 1,00,000 on his account, he can pay Rs 1,00,000 through IGST credit and only Rs 20,000 need be paid from his bank account. This means under IGST he can use that credit to pay future taxes or take a refund from IGST account.

On the other hand, in ITC there are a couple of issues, Sahai said.

"First, I have to choose the period for which I have to file a claim. It will be a minimum of a month, maybe a quarter, six months or a year. If it is for a quarter, I have to wait for the quarter to get over before filing the application. In any case, I then have to combine all the shipping bill and the documents, file a claim, which will be scrutinised prima facie and then an acknowledgement issued," he said.

In the case of ITC refund, exporters have to deal with two tax authorities--the Centre and a certain state tax body.

A technical issue that enters ITC refunds is that one can't get a refund on capital goods input tax credit, because it is 100 per cent exports. "I imported capital goods and paid GST on that. I can adjust under the IGST, but in the ITC system, ITC of the GST of the capital goods is not permitted. That is a challenge for all of us," said Sahai.

However, a senior official at the Central Board of Indirect Taxes and Customs (CBIC) said IGST refunds are proposed to be stopped to plug large-scale frauds in the GST system.

Sahai said, "I agree with the department of revenue that there may be few cases of frauds. But from November 20, they have brought a new GSTR 2B form, where there will be matching of inputs. So, with matching in place and the issue of fraud claims will definitely get addressed," said Sahai.

Then the Bill also proposes to insert a rule under the Customs Act for empowering authorities to confiscate goods that were misdeclared for the purpose of refunds and remission.

Sahai said confiscation is generally done in the rarest of rare cases, say in case of smuggling etc.

He explained that if duty drawback rates or for that matter yet to be declared Remission of Duties and Taxes on Export Products (RoDTEP) are wrongly claimed by a few percentage points, field formation can confiscate goods meant for exports.

"If goods are confiscated, what will the exporter concerned reply to his buyers overseas? Not only his image will be tarnished but also of the country," Sahai explained.

The word 'wrongful claim' is subject to various interpretations and will put exporters at the mercy of field formations even if the remission rates are wrongly calculated or dispute about classification of the product under a particular rate arises, Sahai said

"The remission rates may be 2 per cent of the product value and for such a small benefit, the entire goods should not be confiscated. We request the government to kindly look into the newly created Sub-Section(ja) of Section 113 of the Customs Act," he told reporters.

Exporters say that a large number of them are still awaiting for their claims for 2019-20 and 2020-21 (up to December 2020) both in respect of Merchandise Exports India Scheme (MEIS) and Services Exports India Scheme (SEIS).

They say their liquidity has entirely dried up. Many of them in the micro and small sector are not in a position to take new orders due to rising uncertainty and lack of liquidity at their disposal.

That is why FIEO demanded immediate announcement of rates under RoDTEP as exporters are not able to finalise their contracts.

Exporters continued to contract most months of the current financial year, briefly looking up in September when lockdown was lifted in many areas. However, it again contracted in October and November. Since then, exports rose moderately by 0.14 percent in December and 6.16 per cent in January. However, recent merchandise global trade barometer from the World Trade Organisation indicates that the rebound in world trade in October-December, 2020 may not sustain in January-June, 2021.

EPF

The Bill proposed to tax interest on employees' contribution of more than Rs 2.5 lakh in a year in the Employees' Provident Fund (EPF) or any recognised provident fund. There were concerns over whether this tax would be levied at the time of withdrawal of the fund or every year. The tax burden would be substantial if it is done on withdrawal, it was feared. 

However, officials explained that the tax may be deducted every year on interest accrued from April 1, 2021. The other issue is it whether the tac would be deducted by EPFO as TDS or employees would have to make the payments.  Greater clarity is needed in this respect.