Taxmann | This Week – Editorial Board
Dear Reader,
On 1st February 2022, the Finance Minister, Smt. Nirmala Sitharaman, has presented her fourth Union Budget in Parliament. The Finance Bill, 2022 has proposed more than 100 amendments to the Income-tax Act, Customs and GST Laws. To read the budget highlights, download Taxmann’s Budget Highlight 2022 from the link given below.
This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 31st January to 05th February 2022, namely:
(a) CBDT issues clarifications on the applicability of the MFN clause;
(b) FM proposes to introduce India’s Central Bank Digital Currency (CBDC);
(c) International Financial Services Centres Authority (IFSCA) notifies ‘Fintech Incentive Scheme’;
(d) A person can’t be detained indefinitely for evasion of GST if an investigation is pending; SC grants bail;
(e) Separate registration is not required in importing State if imported goods are sold directly from the port of import: AAR;
(f) IBBI releases a discussion paper on Voluntary Liquidation Process; proposes measures to reduce timelines; and
(g) Accounting for contingent consideration in merger and acquisition.
CBDT issues clarifications considering reports released by Netherlands, France & Switzerland on the MFN clause
The decree of the Netherlands, dated 28-02-2021 and France bulletin, dated 04-11-2016, has declared that the tax rate on dividends under their respective DTAAs with India stands modified under the MFN clause after India entered into a DTAA with Slovenia, which became a member of the OECD on 21st July 2010.
Similarly, the publication of the Swiss Confederation, dated 13-08-2021, has declared that the tax rate on dividends under their DTAA with India stands modified under the MFN clause after India entered into a DTAA with Lithuania and Colombia, which became members of the OECD on 5th July 2018 and 28th April 2020 respectively.
Considering the above decree/bulletin/publication on the interpretation of the MFN clauses, the CBDT has clarified that both the Netherlands and France have passed the said decree/bulletin without having any bilateral consultation with India. Therefore, these would not have any effect on curtailing the tax liability that is payable to the Government of India under the respective tax treaty.
The applicability of the MFN clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income is available if all the following conditions are satisfied:
(a) A treaty with the third State (second treaty) is entered into after the signature/Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State;
(b) The second treaty is entered into between India and a State which is a member of the OECD at the time of signing such treaty;
(c) India limits its taxing rights in the second treaty in relation to the rate or scope of taxation in respect of the relevant items of income; and
(d) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by Section 90(1) of the Income-tax Act, 1961.
However, where in the case of a taxpayer, there is any decision by any court favourable to such taxpayer, this circular will not affect the implementation of the court order in such case.
FM proposes to introduce India’s digital currency
The Finance Minister Smt. Nirmala Sitharaman, in her budget speech, announced the issuance of the Digital Rupee (using blockchain and other technologies) by the Reserve Bank of India starting 2022-23. The FM said that Central Bank Digital Currency (CBDC) would boost the digital economy, leading to a more efficient and cheaper currency management system. The proposed changes to the RBI Act, 1934 have been discussed hereunder:
(a) Insertion of a new definition of ‘bank note’ in Section 2 of RBI Act, 1934
Earlier in October 2021, the Ministry of Finance had received a proposal from the Reserve Bank of India for an amendment to the RBI Act 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form.
Also, Mr Pankaj Chaudhary, Minister of State in the Ministry of Finance, in a written reply to Lok Sabha, had said that
“The RBI is working out a phased implementation strategy for the introduction of Central Bank Digital Currency. Central Bank Digital Currency (CBDC) is introduced by a Central Bank. The Government has received a proposal from the Reserve Bank of India (RBI) in October 2021 for an amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital has been examining use cases and working out a phased implementation strategy for the introduction of CBDC with little or no disruption.”
Accordingly, a new definition of “bank note” has been proposed to be inserted into section 2 of the RBI Act, 1934. As per newly inserted Section 2(aiv) “bank note” means a bank note issued by the Bank, whether in physical or digital form, under section 22. Section 22 of the RBI Act, 1934 gives the RBI sole right to issue bank notes.
A CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.
The amendment is in line with the ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’, which aims to create a facilitative framework for the creation of the official digital currency to be issued by the RBI. The Bill is, however, not introduced in Parliament yet.
(b) Non-applicability of certain provisions to digital form of bank notes
A new Section 22A has been proposed to be inserted, which prescribes that certain Sections of the RBI Act, 1934, which specifically relates to the physical bank note, would not apply to the digital form of the bank notes. The new section 22A prescribes the following sections which do not apply to digital bank notes:
It is a welcome move by the Govt. The inclusion of digital currency would lead to a more efficient and cheaper currency management system. However, various questions relating to the issuance and dealing in digital currency remain unanswered in the Finance Bill. It is expected that RBI will notify provisions with regard to the Central Bank Digital Currency in a phased manner. RBI might also run a pilot project on the issuance of digital currency to assess the issues relating to the transactions in digital currency.
Read the Story ? ?
International Financial Services Centres Authority (IFSCA) notifies “Fintech Incentive Scheme”
The IFSCA has notified IFSCA (FinTech Incentive) Scheme, 2022 vide Notification No. IFSCA/2021-22/GN/022 dated 02-02-2022. The objective of the scheme is to promote the establishment of a world-class FinTech Hub across jurisdictions at International Financial Services Centre (IFSCs) by providing financial support to FinTech activities in the form of a specific grant. The scheme specifies provisions relating to eligibility criteria, the meaning of ‘fintech’, eligible beneficiaries and the manner of execution of the scheme.
The scheme is effective from the 02nd February 2022 and shall be operational for an initial period of three years from the date of commencement. The key highlights of the scheme are discussed hereunder:
(a) Who will be considered as “Fintech”?
As per Regulation 3(vii) of the IFSCA (FinTech Incentive) Scheme, 2022, “FinTech” means a technologically enabled innovative solution aiding or assisting Financial Institutions in the delivery of Financial Products or Financial Services.
(b) Who will be the eligible beneficiaries?
This scheme shall be open to the following Fintechs:
(c) What kind of incentives will be given to eligible applicants?
As per the scheme following 6 kinds of Incentives will be given to the eligible applicants, a) FinTech Start-up grant, b) Proof of Concept (PoC) grant, c) Sand-box grant, d) Green FinTech Grant, e) Accelerator Grant, and f) Listing Support Grant.
(d) How will the scheme be executed?
Disbursement shall be made subject to compliance with the specified conditions. Further, the authority may specify detailed guidelines for the implementation of this scheme.
A person can’t be detained indefinitely for evasion of GST if the investigation is pending: SC
The Supreme Court has recently held that a person cannot be detained indefinitely in case of evasion of GST if an investigation is pending. Since he has been in jail for 25 months, such detention amounts to almost 50% of the maximum sentence of 5 years. Therefore, bail is to be granted. The Honorable Apex Court gives this ruling in the case of Paresh Nathalal Chauhan v. State of Gujarat.
Facts
The petitioner was in custody for 25 months out of a total period of 5 years for which a person can be sentenced under GST for evasion of tax. He contended that proceedings arising from evasion of GST were preceded by a search operation where the officer occupied the house for more than a week with lady members present. It filed a bail application before the Apex Court as the investigation is still pending.
Supreme Court
The Honorable Supreme Court observed that the petitioner has been in custody for 25 months out of a total period of 5 years for which he can be sentenced. The allegation against him was that he played an essential role in executing the scam and that confidential investigation was still underway to identify these persons and the role played in executing the scam. The investigation is still stated to be pending though a complaint has been filed. He can’t be indefinitely detained in custody, more so having already undergone 25 months of custody when he can be sent behind bars for a maximum of five years. It is almost 50% of the sentence. In view of the aforesaid facts and circumstances, the Apex Court held that bail would be granted on terms and conditions to the trial court’s satisfaction.
Read the Ruling ? ?
Separate registration is not required in importing State if imported goods are sold directly from the port of import: AAR
The Authority for Advance Ruling of Karnataka has recently held that there is no need to obtain separate registration at the place of importation if imported goods are customs cleared from a port situated in another state and supplied directly to customers in neighbouring States. The Karnataka Authority gives this Advance Ruling in the case of Pine Subsidiary Industry.
Facts
The applicant was an importer of Gum Resin and Damar Battu, having a registered office in Bengaluru and holding a GST certificate of Karnataka State. It filed an application for advance ruling to determine whether it would be required to obtain registration in importing States if goods are imported, sold and delivered directly from CFS (Container Freight Station) to customers from those States.
AAR
The Authority for Advance Ruling observed that as per the provisions of the place of supply of Goods under Section 11(a) of IGST Act, 2017, “the place of supply of goods imported into India shall be the location of the importer”. In the instant case, the location of the importer would be the State of Karnataka, where the applicant obtained the GST registration. Therefore, the applicant, though importing the goods to the port of Chennai, would be deemed to have been supplied to the location of the importer, i.e., Karnataka, and then further supplied to the customer. Hence the transaction where imported goods are supplied directly from the port of import to the customer located in other states or Union territories other than the State of Karnataka, such transaction shall be treated as a supply of goods in the course of inter-State trade. Therefore, the applicant would be allowed the transaction using Karnataka GSTIN and separate registration is not required in importing State.
Read the Ruling ? ?
IBBI releases discussion paper on Voluntary Liquidation Process; proposes measures to reduce timelines
The IBBI releases a discussion paper w.r.t. amendment to Voluntary Liquidation Process, Regulations, 2017 on 01st February 2022. In the discussion paper, IBBI has raised concerns that the voluntary liquidation proceedings are unnecessarily delayed. There is a critical need for a comprehensive review of the timelines provided for various activities under the voluntary liquidation process to further streamline and strengthen the process. The focus is on compressing the overall process timeline.
Amendment Proposed
(a) Reduction in the timeline for preparation of the list of stakeholders
IBBI proposed reducing the timeline for preparation of the list of stakeholders by the liquidator to 15 days from the last date for receipt of claims in case no claims are received from the creditors. Under the extant norms, the timeline for the preparation of the list of stakeholders is 45 days.
(b) Reduction in the timeline for distribution to stakeholders
IBBI has proposed reducing the period for distribution of proceeds from realisation to the stakeholders from the current six months to a period of thirty days from the receipt of the amount.
(c) Amendment in the period for submission of Final Report by AA
IBBI has proposed to reduce the period of submission of the final report along with the application for dissolution, to the AA, to 90 days (where no claims are received) or 270 days (where claims are received from creditors), as the case may be.
(d) Introduction of the Compliance certificate and compliance checklist
The compliance certificate and checklist of compliances may also be submitted along with a final report to Adjudicating Authority, as it would be expeditious for AA if the checklist of compliances is made available. IBBI also proposed the format of the Compliance certificate in form-I.
IBBI has communicated that comments on the discussion paper may be submitted electronically by 22nd February 2022 by visiting the IBBI website, www.ibbi.gov.in.
Accounting for contingent consideration in merger and acquisition
Contingent consideration is frequently incorporated in the price structures of merger and acquisition transactions. It is a consideration that depends upon some future uncertain events. It arises upon happening or non-happening of those future events which may or may not happen.
For entities complying with AS
An entity complying with AS shall classify contingent consideration as liability only if it meets the definition of liability, as provided in AS 29, Provisions, Contingent Liabilities and Contingent Assets.
In any other case, the consideration would be classified as equity.
Contingent consideration which is classified as liability, should be included in the total purchase consideration only if the conditions prescribed by AS 14 are met. Whereas for contingent consideration classified as equity, only one condition as prescribed by AS 14 is required to be satisfied.
In both cases, the effect of adding contingent consideration to the amount of purchase consideration goes to either goodwill or capital reserve, as the case may be.
For entities complying with Ind AS
On the other hand, an entity complying with Ind AS shall classify contingent consideration as liability only if it meets the definition of financial liability as provided in para 11 of Ind AS 32, Financial Instruments: Presentation.
In any other case, the contingent consideration is classified as equity.
The buyer shall recognise a contingent consideration, liability, or equity, as and when it meets the respective definitions of Liability & Equity as provided in Ind AS 32. It is valued at Fair Value in accordance with the guidance provided in Ind AS 109, Financial Instruments, and Ind AS 113, Fair Value Measurement.
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