Direct Tax

The previous quarter saw some interesting developments such as the withdrawal of retrospective application of tax provisions for indirect transfers, tax sops to facilitate strategic disinvestment and extension of due dates for certain filings.

Himanshu SinhaPartner

Aditi GoyalCounsel

Yash VarmaniAssociate

The Government’s tax initiatives in this quarter were focused on boosting investor sentiment and reducing tax uncertainty. Towards this end, the government withdrew the retrospective application of indirect transfer provisions and extended the applicability of the safe harbour rules. Further, amendments aimed at facilitating disinvestment of public sector companies were proposed.

Key Developments

  • Retrospective application of the indirect transfer provisions withdrawn

    The indirect transfer provisions were inserted in the (Indian) Income Tax Act, 1961 (ITA) in 2012. Under these provisions, gains arising from transfer of shares in an offshore entity, deriving substantial value from assets located in India (commonly referred to as 'indirect transfer'), were taxable as capital gains in India. These provisions applied retrospectively from 1 April 1962. This resulted in tax demands being raised for transactions undertaken prior to 28 May 2012 as well, i.e., the date on which the amendment received presidential assent.

    Recently, the income tax law was amended to do away with this retrospective applicability. Now, tax demands cannot be raised under these indirect transfer provisions for transactions undertaken prior to 28 May 2012. Further, tax demands already raised for such transactions would be nullified subject to fulfillment of specified conditions. This measure is expected to provide significant certainty and relief to the investor community.

  • Board for Advance Rulings constituted

    To provide tax certainty, a scheme for obtaining advance rulings was incorporated in the ITA by the Finance Act, 1993. Under this scheme, specified taxpayers could obtain an advance ruling for certain transactions by filing an application before the Authority for Advance Rulings (AAR) which was chaired by a retired Supreme Court Justice/High Court Justices.

    However, as eligible persons were not found for appointment as the Chairman/Vice-chairman of the AAR (since only retired Supreme Court or High Court Judges could be appointed), the AAR was not able to dispose of applications in a timely manner. As a solution, the Finance Act, 2021 specified that a Board for Advance Rulings (BAR), composed of two tax officers (not below the rank of Chief Commissioner) nominated by the Central Board of Direct Taxes (CBDT), would be constituted and the applications pending before the AAR would be transferred to it. The CBDT has now constituted the BAR at New Delhi and Mumbai to pronounce advance rulings from 1 September 2021 onwards.

  • Due dates for certain compliances under the ITA extended

    Owing to the hardship faced by taxpayers due to the second wave of the Covid-19 pandemic, the CBDT inter alia relaxed the timelines for certain corporate compliance:

    • Filing annual income tax returns for the financial year (FY) 2020-21;
    • Filing transfer pricing certificates (in form 3CEB) for international transactions with associated enterprises during FY 2020-21;
    • Filing equalization levy statements (in form 1) for FY 2020-21.
  • Facilitating strategic disinvestment of public sector companies

    To facilitate the process of strategic disinvestment of public sector companies, the following tax relaxations have been provided/proposed:

    • Non-applicability of deemed income provisions on receipt of equity shares under strategic disinvestment:

      The deemed income provisions of the ITA provide that where any person receives shares of a company for a consideration less than their fair market value (FMV) (determined in the prescribed manner), the difference between the FMV and the consideration would be taxable in the hands of the person receiving such shares. The CBDT has notified that these provisions would not apply to a person who receives equity shares of a public sector company from the Central Government or any State Government under strategic disinvestment from FY 2021-22.

    • Proposal to allow set off / carry forward of losses in case of strategic disinvestment:

      Under the ITA, losses incurred by a privately held company cannot be set-off and carried forward in future years unless 51% of the company's voting power is beneficially held by the persons who held such voting power on the last day of the FY in which the loss was incurred. To facilitate such disinvestment, it has been proposed that this provision would not apply to public sector companies following their strategic disinvestment.

    Accordingly, losses incurred up to the FY of strategic disinvestment, as well as losses incurred in the FY of disinvestment, can be set-off or carried forward by such public sector companies post-disinvestment. However, this relaxation would cease to apply from the FY in which the ultimate holding company (immediately after completion of the strategic disinvestment) ceases to hold (directly or indirectly) 51% of the voting power of such erstwhile public sector company. Consequent legislative amendments are expected shortly.

  • Applicability of safe harbour rules extended

    Under Indian tax law, the safe harbour rules provide for a mechanism whereby taxpayers can opt for transfer pricing margins which will be automatically accepted by the tax authorities.  The CBDT notifies the acceptable transfer pricing margins under the safe harbour rules from time to time.

    The CBDT had earlier notified that the margins applicable to transactions undertaken in FYs 2016-17 to 2018-19 would also apply to transactions undertaken in FY 2019-20. The CBDT has now extended the applicability of these margins to transactions undertaken in FY 2020-21 as well.

These measures reflect the Government’s efforts to provide a tax environment conducive to growth and investment, especially to support businesses and taxpayers in the backdrop of the pandemic. However, many concerns remain unaddressed, particularly in the areas of tax simplification and enforcement. It is hoped that the Government will continue to take measures to ensure a stable regulatory and policy framework for tax administration and compliance.

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