Taxmann – This Week

Welcome to Taxmann.com | Newsletter – Reporting the Facts with Taxmann’s Analysis. Today’s Edition Brings to You an Analytically Summary of Key Updates Reported at Taxmann.com, during the Previous Week, i.e. from July 22nd to 27th, namely:

a) Union Budget 2024 - Highlights of the Finance (No. 2) Bill, 2024;

b) Highlights of Economic Survey for 2023-24;

c) Goods can’t be detained for non-generation of e-invoice if there was no intention to avoid tax payment: HC;

d) HC set aside penalty order issued merely on ground that vehicle was not on its normal route;

e) SEBI revamps AIF rules with new norms for migrated venture capital funds; and

f) Recognition of subsequent repair cost incurred after completion of useful life of PPE.

1. Union Budget 2024 - Highlights of the Finance (No. 2) Bill, 2024

On July 23, 2024, the Finance Minister, Smt. Nirmala Sitharaman tabled the Finance (No. 2) Bill, 2024, proposing various amendments to tax and corporate laws.

The Finance (No. 2) Bill 2024 has introduced several noteworthy proposals, which can be divided into the following categories: Tax Rates, Deductions and exemptions, Business or Professions, Capital Gains, Charitable and Religious Trusts, Assessment and appeals, TDS & TCS, and Other amendments.

The Finance (No. 2) Bill 2024 has also proposed several amendments to the taxation of buy-backs of shares. As per the proposed amendments, the sum paid by a domestic company to the shareholders under a buyback shall be treated as a dividend in the hands of the shareholders. The following amendments have been proposed with effect from 01-10-2024, which shall apply to any buy-back of shares on or after this date.

• Section 2(22) is proposed to be amended to treat the sum received by a shareholder on account of the buyback of shares as a dividend.
• A proviso has been proposed to be inserted to Section 46A to provide that the value of consideration received from the company will be considered nil for the purpose of computation of capital gains.
• Section 57 has been proposed to be amended to provide that no deduction for expenses shall be allowed against such dividend income arising under Section 2(22)(f) while determining the income from other sources.
• A sunset date is proposed to be inserted in Section 115QA that no taxes shall be payable by the company on the buyback of shares.
• A sunset date is proposed to be inserted in Section 10(34A) that no exemption shall be available for the amount received by the shareholders upon the buyback of shares.
• An amendment has been proposed to Section 194 to require the deduction of tax at source from the sum paid on the buyback of shares.

Other key amendments proposed by the Finance (No. 2) Bill 2024 are as follows:

• The standard deduction for employees paying tax under the new regime is increased from Rs. 50,000 to Rs. 75,000
• Under the new tax regime of Section 115BAC, the 5% and 10% tax slabs will apply to income up to Rs. 7 lakh and Rs. 10 lakh, respectively, thereby increasing the income brackets by Rs. 1,00,000 in both cases.
• There will only be two holding periods, 12 months and 24 months, for determining whether the capital gains is short-term capital gains or long term capital gains. For all listed securities, the holding period shel be 12 months and for all other assets, it shall be 24 months.
• The rate for short-term capital gains under Section 111A on STT-paid equity shares, units of equity-oriented mutual funds, and units of a business trust increased to 20% from the current rate of 15%.
• Indexation available under second proviso to section 48 is removed for calculation of any long-term capital gains.
• The tax rate on long-term capital gains is 12.5% in respect of all category of assets.
• The exemption from long-term capital gains under Section 112A on STT-paid equity shares, units of equity-oriented funds, and business trusts is increased from Rs. 1,00,000 to Rs. 1,25,000.
• 5% TDS rate under Section 194DA, Section 194G, Section 194H, Section 194-IB, Section 194M has been reduced to 2%.
• Any sum referred to in sub-section (1) of section 194J shall not be treated as "work" for the purposes of TDS under section 194C.

Download Highlights of Finance (No. 2) Bill, 2024

Watch Taxmann's Latest Video on the Budget Marathon 2024-25

2. Key Highlights of Economic Survey for 2023-24

Finance Minister Nirmala Sitharaman tabled the Economic Survey for 2023-24 in the Parliament on July 22, 2024. The Economic Survey is an annual report published by the Government of India that presents an overview of the Indian economy. It is prepared by the Economic Division of the Department of Economic Affairs under the guidance of the Chief Economic Advisor. After approval by the Finance Minister, it is presented in the Parliament.

The Economic Survey 2023-24 provides insights into the current state of the Indian economy, the effectiveness of government policies, and the future outlook. The survey underscores the Indian economy's resilience amidst global uncertainties and highlights key areas such as fiscal management, monetary policy, inflation control, external sector performance, and sectoral developments.

According to the survey, India's post-pandemic recovery has been strong due to counter-cyclical fiscal policies focusing on capital expenditure, boosting public and private investments, and encouraging digital adoption. India maintained macroeconomic stability despite challenges like geopolitical tensions, inflation, and current account deficits (CAD). Further, improvement in fiscal balances through tax compliance, expenditure restraint, and digitisation has helped maintain economic stability.

The key discussions on Direct Taxation, GST, Customs, Corporate Law, and other laws highlighted in the Economic Survey in this article.

Read the Key Highlights?

3. Goods can’t be detained for non-generation of e-invoice if there was no intention to avoid tax payment: HC

The High Court of Allahabad has recently held that goods can’t be detained for non-generation of e-invoice if there was bona fide mistake on part of assessee for not generating e-Invoice. Moreover, in the absence of any specific finding with regard to mens rea for evasion of tax, proceedings under section 129(3) of the CGST Act could not be initiated. This ruling is given by the Honorable Allahabad High Court in case of Nancy Trading Company v. State of U.P.

Facts

The petitioner was engaged in trading. The department detained the petitioner's goods in transit, and it was alleged that an e-invoice was not generated as per Rule 48 of the CGST Rules. The goods were released after payment of tax and penalty, and the petitioner filed an appeal against the detention order, but the same was rejected. It filed a writ petition against the demand order.

High Court

The Honorable High Court noted that there was no discrepancy with regard to quality and quantity of goods as mentioned in Tax Invoice, e-waybills, GR's etc. which were accompanying goods. It was a case of technical error committed by the petitioner for not generating an e-invoice before the movement of goods.

The Court also noted that the limit of annual turnover for issuing e-way bill was reduced w.e.f. 01.08.2022 to Rs. 10 crores and mistake committed by petitioner was bonafide. Therefore, in absence of any specific finding with regard to mens rea for evasion of tax, it was held that the impugned order demanding tax and penalty was liable to be set aside.

Read the Ruling

4. HC set aside penalty order issued merely on ground that vehicle was not on its normal route

The High Court of Allahabad has recently held that penalty can’t be levied merely on ground that vehicle was not on its normal route if no discrepancy with regard to quality or quantity of goods was found and no finding was recorded with regard to mens ria to avoid payment of tax. This ruling is given by the Honorable Allahabad High Court in case of Vishal Steel Supplier v. State of U.P.

Facts

The petitioner was engaged in the business of trading of steel goods. The goods were being transported from Muzaffarnagar to Ghaziabad and intercepted at Hapur by the department. The goods were detained on the pretext that it was not on their normal route and the driver of the truck had the mobile number of a dealer in Hapur. Therefore, authorities made an inference that goods would be unloaded at Hapur without proper documentation. The petitioner filed writ petition and contended that goods were detained only on the basis of surmises and conjunctures.

High Court

The Honorable High Court noted that no discrepancy had been pointed out at time of detention or seizure of goods with regard to quality or quantity of goods. Moreover, the Court observed that the authorities had also not recorded any finding with regard to mens rea to avoid payment of tax. It was also not a case of the department that under the GST Act, the dealer was required to disclose the specific route of its journey for the movement of goods. Therefore, the Court held that the impugned order was to be set aside, and any amount deposited by the petitioner in the present proceeding shall be refunded.

Read the Ruling

5. SEBI revamps AIF rules with new norms for migrated venture capital funds

SEBI, vide?Notification dated July 11, 2024, has amended the SEBI (Alternative Investment Funds) Regulations, 2012, whereby a new Chapter III-D regarding 'Migrated Venture Capital Funds' has been introduced. The key provisions include (a)?defining the term ‘migrated venture capital fund’, (b)?outlining its eligibility criteria, (c) establishing the procedure for granting a certificate of registration, (d)?specifying investment conditions and criteria, (e)?tenure, (f)?listing requirements and (g)?record maintenance obligations.

a) Need for this amendment

On January 12, 2024, SEBI issued a Consultation Paper seeking public comments on proposals to provide flexibility to AIFs, VCFs and their investors to deal with unliquidated investments of their schemes beyond the expiry of tenure. One of the proposals included the need for a new framework for migrating VCFs to AIF Regulations. While AIF Regulations provide an option to VCFs to seek re-registration under AIF Regulations subject to the approval of 2/3rd of investors by value, very few VCFs have opted for this due to operational difficulties in re-registration, such as fees and investment conditions. Therefore, a new framework for migration to AIF Regulations was needed.

b) What is the meaning of ‘migrated venture capital fund’?

A ‘Migrated venture capital fund’ means a fund previously registered as a venture capital fund under the SEBI (Venture Capital Funds) Regulations, 1996 and subsequently registered under these regulations as a sub-category of Venture Capital Fund under Category I -Alternative Investment Fund.

Further, “investable funds”?means the corpus of the scheme of the migrated venture capital fund, net of expenditure for administration and management of the fund.

c) What are the eligibility criteria for granting a certificate as a Migrated Venture Capital Fund?

The Board must consider the following eligibility conditions for the grant of certificate as ‘Migrated Venture Capital Fund’:

i) The applicant has a certificate of registration as a Venture Capital Fund under SEBI (VCF) Regulations;

ii) The applicant is a fit and proper person;

iii) The applicant has furnished the required information as specified by the Board;

iv) The applicant has no pending investor complaints about non-receipt of funds or securities for any of its schemes whose assets are not liquidated on the date of application;

v) No scheme launched by the applicant has an investment from an investor of less than Rs 5 lakh.

vi) Each scheme launched by the applicant has a firm commitment from the investors for a contribution of an amount not below Rs 5 crores before the start of operations by the applicant.

d) Restrictions on public offers and private placement requirements for Migrated Venture Capital Fund

A migrated venture capital fund is prohibited from issuing any document or making an advertisement that invites offers from the public for the subscription or purchase of any of its units. It can receive monies for investment only through the private placement of its units.?Further, the migrated venture capital fund must:

i) issue a placement memorandum containing details of the terms and conditions under which funds are proposed to be raised from investors or

ii) enter into a contribution or subscription agreement with investors specifying the terms and conditions for raising funds.

Also, the migrated venture capital fund must file a copy of the placement memorandum, or a copy of the contribution or subscription agreement entered into with investors with the Board, along with a report of money collected from the investors, for informational purposes.

e) What are the investment conditions for Migrated Venture Capital Fund?

The investments by the migrated venture capital fund must be subject to the following conditions –

i) the migrated venture capital fund must not invest more than 25% corpus of the fund in a single venture capital undertaking.

ii) the migrated venture capital fund may invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be issued by RBI and the Board from time to time.

iii) The migrated venture capital fund must not invest in the associated companies and must invest according to the prescribed criteria.

f) What are the investment criteria for Migrated Venture Capital Fund?

The migrated venture capital fund must invest as below –

i) at least 2/3rd?of the investable funds must be invested in unlisted equity shares or equity-linked instruments of venture capital undertaking

ii) not more than 1/3rd?of the investable funds may be invested by way of

• subscription to the IPO of a venture capital undertaking whose shares are proposed to be listed
• investment in debt or debt instrument of a venture capital undertaking in which venture capital fund has already invested by way of equity
• preferential allotment of equity shares of a listed company subject to a lock-in-period of one year,
• investment in equity shares or equity-linked instruments of a financially weak company or a sick industrial company whose shares are listed
• Investment in special purpose vehicles (SPV) created by a venture capital fund for the purpose of facilitating or promoting investment.

g) Tenure of a migrated venture capital fund

The tenure of a migrated venture capital fund must be calculated according to the Board's specifications. An extension of up to 2 years may be allowed with the approval of 2/3rds of the unit-holders by investment value. If unit-holder consent is not obtained or the extended tenure expires, the migrated venture capital fund or scheme must be wound up.

h) Listing Requirements and Record Maintenance for migrated venture capital fund

No migrated venture capital fund must be entitled to get its units listed on any recognised stock exchange till the expiry of 3 years from the date of issuance of units by the migrated venture capital fund. ?Further, the migrated venture capital fund must maintain its records for a period of 8 years after the winding up of the fund. ?

Conclusion

These amendments mark a significant step towards providing flexibility and regulatory clarity for migrated venture capital funds. They facilitate a smooth and cost-effective migration from VCF to AIF Regulations, ensuring that certain flexibilities under VCF regulations continue to apply to migrated VCFs to avoid any adverse impact on investment activities. Further, no regulatory costs in the form of application, registration or migration fees will be levied on the VCFs for this migration.

By addressing operational challenges and streamlining the re-registration process, SEBI ensures these funds can operate effectively while maintaining transparency and compliance. These amendments are expected to promote investor confidence and support the sustainable growth of venture capital investments in India.

Read the Notification1

6. Recognition of subsequent repair cost incurred after completion of useful life of PPE

The expenditure incurred on asset shall be capitalized only when it satisfies the condition prescribed under paragraph 7 of Ind AS 16. This paragraph prescribes the following conditions:

(a) it is probable that future economic benefits associated with the item will flow to the entity

(b) the cost of the item can be measured reliably

However, it is important to note that the recognition principle prescribed under paragraph 7 not only applies at the time of initial recognition but also it is equally applicable to the subsequent cost incurred to add, to replace part of or service an item of property, plant, and equipment (PPE). These subsequent costs are critical in maintaining or enhancing the PPE functionality and efficiency over its useful life.

In this regard, the estimation of the useful life of PPE is a matter of judgment based on the experience of the entity with similar PPE. This judgment also influences decisions regarding the capitalization of subsequent costs, ensuring that only expenditures that extend the useful life or enhance the economic benefits of PPE are capitalized.

In contrast, the repair and maintenance costs incurred on a day-to-day basis are not recognized in the carrying amount of an item of PPE; rather, these costs are recognized in profit or loss as incurred. However, there are parts of some items of PPE that may require replacement at regular intervals. Under the recognition principle in paragraph 7, an entity recognizes the cost of replacing part of an item of PPE when the carrying amount of such an item is incurred if the recognition criteria are met. This ensures that only significant expenditures that enhance the future economic benefits of PPE are capitalized, aligning with the entity's judgment regarding the useful life and economic utility of the PPE.

In a recent opinion from the Expert Advisory Committee (EAC) of ICAI, a company sought guidance on the recognition of repair and restoration cost incurred on plant and machinery after completion of its useful life. The company has a washery plant which has surpassed its useful life but was in operation due to regular maintenance. The company then planned for restoration of plant which shall increase its capacity utilization by 20%. The committee observed that, though the asset has surpassed its useful life, the expenditure incurred on the PPE has improved its capacity utilization which means there are future economic benefits associated with the expenditure incurred. Also, the cost incurred can be reliably measured. Hence, even if the washery plant has surpassed its useful life, if subsequent expenditure incurred on it satisfies the recognition criteria prescribed under paragraph 7 of Ind AS 16, the same shall be capitalized.

Read the Story

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