With an aim to bring clarity and transparency to the income tax framework, the government in the previous quarter, issued circulars to resolve ambiguities surrounding certain new withholding tax provisions that came into effect on 1 July 2022. On the judicial side, the Supreme Court upheld the validity of reassessment notices issued under the old regime and provided significant relief to the tax department.
Validity of reassessment notices issued between 1 April 2021 to 30 June 2021 upheld by the Supreme Court
The Supreme Court in UOI v Ashish Agarwal upheld the validity of reassessment notices issued between 1 April 2021 and 30 June 2021 under the old provisions of section 148 of the Income Tax Act, 1961 (IT Act). This decision comes as a relief to the tax department as more than 90,000 reassessment notices issued under the old reassessment provisions have been held to be valid.
Although the Supreme Court concurred with the finding of the High Courts that the notices should have been issued under the substituted provisions as amended by the Finance Act, 2021 (FA 2021), it went on to observe that the quashing of all such notices would frustrate the purpose of reassessment proceedings. Consequently, the Supreme Court upheld the validity of the notices issued under the old reassessment provisions and directed that such notices be deemed as show-cause notices under the substituted provisions introduced through the FA 2021. While upholding the validity of notices issued under the old provisions, the Supreme Court tried to safeguard the interest of revenue and at the same time tried to protect the taxpayers by holding that defences under Section 149 will be available to the taxpayer. The Supreme Court therefore, tried to strike a balance between the interests of the taxpayers and the tax department, but disregarded the fact that the benefit of liberal interpretation of statutes cannot be given to the tax department, which is an authority of the State. Given this, the ruling is expected to have a far-reaching impact on tax jurisprudence in India.
(To read more on this ruling, click here.)
Guidelines on tax withholding on benefits/perquisites arising from business or profession
Under the newly introduced section 194R of the IT Act, any person responsible for providing any benefit or perquisite to a resident, arising from business or the exercise of a profession by such resident, must ensure that tax has been deducted at 10% of the value of such benefit or perquisite. The benefit or perquisite may or may not be convertible to money. This provision was introduced through the Finance Act, 2022 (FA 2022) and came into effect on 1 July 2022.
On 16 June 2022, the CBDT notified guidelines to clarify ambiguities surrounding this provision.
- Taxability for the recipient need not be tested: The person providing the benefit or perquisite is not required to check if such benefit is taxable in the hands of the recipient and is only required to ensure that tax has been deducted.
- Provision also applies to cash benefits: In addition to benefits provided in kind, the provision also applies to benefits paid in cash.
- Capital assets also covered: Capital assets such as car, land, etc., will also be covered within the ambit of this provision.
- Provision not applicable to sales/cash discount and rebates: Tax will not have to be withheld on sales discounts, cash discounts and rebates allowed to customers. However, free samples will be covered within the ambit of the provision.
- Actual user of benefits or perquisites irrelevant: Tax will have to be withheld as long as the benefit is provided in substance to a person/entity that is engaged in business/professional activities, even if the actual user of the benefit is a relative/director of the entity or any other associated person who individually may not be carrying on a business or a profession.
- Excluded entities: The provision will not apply if the benefit or perquisite is provided to a government entity, such as a government hospital, not carrying on business or profession.
Valuation: For the purposes of tax withholding, the benefit will be valued on fair market value basis except in the following cases:
- Benefit/perquisite purchased by the provider: Valuation will be based on the purchase price.
- Benefit/perquisite manufactured by the provider: Valuation will be based on the price charged to customers.
GST will not be included in the valuation of the benefit.
- Reimbursement of out-of-pocket expenses: The applicability of Section 194R will depend on the manner in which the out-of-pocket expenses are invoiced. For contracts for provision of services, if the invoice for out-of-pocket expenses is issued in the name of the client but paid by the service provider and thereafter reimbursed by the client, then such reimbursement would not be treated as a benefit/perquisite for the purposes of this provision. However, if the invoice for out-of-pocket expenses has been issued in the name of the service provider and has been paid/reimbursed by the client, tax withholding will be required.
- Applicability to dealer/business conferences: Expenditure incurred on a dealer/business conference will not be considered as a benefit/perquisite if the conference is held with the primary objective of educating dealers or customers. However, such conferences must not be in the nature of incentives/benefits to dealers who have achieved certain targets. Further, any expenses attributable to family members or leisure trips will constitute benefits for the purposes of the provision and would require tax withholding.
Clarification on tax withholding on virtual digital assets
Under section 194S of the IT Act, any person responsible for paying to a resident any sum as consideration for the transfer of a virtual digital asset (VDA) is required to deduct tax at the rate of 1%. This provision was introduced through FA 2022 and came into effect on 1 July 2022.
The CBDT has issued circulars and notifications to clarify various aspects of this provision, some of which are discussed below.
- Liability to deduct tax when the transfer of the VDA is undertaken through an exchange and the VDA is owned by a person other than the exchange: Tax should be deducted only by the exchange while making the payment to the seller (i.e., the owner of the VDA being transferred). In a case where the payment between the seller and the exchange is through a broker, the onus to deduct tax will be on the exchange as well as the broker. The broker may deduct tax subject to a written agreement with the exchange.
- Liability to deduct tax when the transfer of the VDA is through an exchange and the VDA is owned by the exchange: In this case, since the exchange itself will be the seller, the primary responsibility to deduct tax would be that of the buyer (or the broker engaged by the buyer). However, in case the buyer is unsure of the ownership of the VDA by the exchange, it may enter into an agreement with the exchange requiring the exchange to pay tax on a quarterly basis.
- Liability to deduct tax when the consideration is in kind or in the form of another VDA: Under the provision, the person responsible for paying consideration is required to ensure that tax has been paid. Therefore, in this case, the buyer will release the consideration in kind after the seller provides proof of payment of tax. In a transaction wherein the parties exchange VDAs, each party will need to ensure that the other has deposited the applicable tax. If an exchange is involved, the exchange may carry out tax withholding based on a written agreement. In case tax has been deducted in kind (i.e., in the form of a VDA), such VDA may be converted into cash by following the procedure set out in the circular.
- Interplay between sections 194Q and 194S: The CBDT has not clarified if VDAs will be considered as ‘goods’ for the purposes of the IT Act. However, it has clarified that once tax has been deducted under this provision, tax need not be deducted under section 194Q, which pertains to the purchase of goods.
- Consideration for tax withholding: Tax may be withheld on the ‘net’ consideration after excluding GST and service charges.
- Tax withholding where payment is made through payment gateways: If the buyer has withheld tax, the payment gateway will not need to carry out tax withholding. The payment gateway should obtain an undertaking from the buyer in this respect.
Exclusion of certain cards, vouchers, etc., from the definition of VDAs: The following have been excluded from the definition of VDAs:
- Gift cards or vouchers that may be used to obtain goods/services or a discount on goods/services;
- Mileage points, reward points, or loyalty cards, given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate, or promotional program that may be used or redeemed only to obtain goods/services or a discount on goods/services;
- Subscription to websites or platforms or applications;
- Non-fungible tokens whose transfer results in the transfer of ownership of an underlying tangible asset, with such transfer of ownership being legally enforceable.
While several controversies were settled in this quarter, some questions remain. Though the Supreme Court has settled the issue of the validity of notices issued under the erstwhile provisions of section 148, other controversies (such as with respect to limitation) are yet to be settled. It will be interesting to see how the courts deal with such issues. Similarly, the CBDT has put to rest many questions through the circulars issued for the new tax withholding provisions. However, both these provisions are expected to give rise to significant implementation challenges that are yet to be addressed by the CBDT.