CBDT clarification on tax on freebies could create complications for unlisted companies, say experts

A government circular issued this week and aimed at addressing difficulties in deducting tax at source (TDS) on certain transactions could lead to complications for unlisted companies issuing bonus shares, rights issues or waving outstanding loans or borrowing money, say tax experts.

The government had introduced a new section (194R) to the Income-tax Act, under which a 10% TDS was to be levied from July 1 on transactions where a “benefit” was offered by an individual or a company to another.

Many experts said the way the section was worded meant TDS would be applicable not only On Tuesday, the Central Board of Direct Taxes (CBDT) came up with a circular on the law in an attempt to calm the nerves. This, say tax experts, however, could lead to new complications.

“The intent of Section 194R, as evident from the explanatory memorandum to the Finance Act, was to track receipt of benefits which a recipient may not report and, therefore, go untaxed. Unfortunately, the (latest) circular has gone significantly beyond this intent,” said Ketan Dalal, managing partner, Katalyst Advisors.

“One of the major issues in NPA resolution, including in IBC, is the tax position on loan waivers vis-à-vis the borrower. While the recent circular talks of no TDS in the context of banks and certain institutions being lenders, it has left open the issue of the taxability itself,” said Dalal.

There could also be a larger issue at stake, experts said. That is, whether the circular would override the Income Tax Act’s provisions.

“It is well settled that circulars being executive/administrative in character cannot supersede or override the Act and the statutory rules. It is equally well-settled that a subject is not to be taxed unless the words of a taxing statute unambiguously impose the tax on him,” said Paras Savla, partner at CA firm KPB & Associates.

According to experts, bonus shares or rights issued by unlisted companies would be viewed as benefits and under the law, a 10% TDS would be levied on those.

Many claim that this would also mean that if a company issues bonus shares before listing to its existing shareholders, that could be taxed.

It could also have implications in situations where an individual is pumping capital into his or her own company where there are other shareholders.

“The circular aims at giving clarification on issues to remove difficulties in implementation of this provision, but it could result in creating tax complications on the issuance of bonus shares, rights issues in companies where the public is not substantially interested and waivers on loans between companies and individuals,” said Savla.

Many tax associations had even approached the government with regard to issuing circulars that, they argued, could override the provisions of the Income-tax Act and the already established positions through Supreme Court decisions.

In a recent representation, the Chamber of Tax Consultants said in the last two Finance Acts, there had been a new trend adopted to issue clarifications which were made binding not only on the tax department but also on the taxpayers.

“It is very well settled that such clarifications/ instructions/ guidelines, though binding on the department, are not binding on either the courts or the taxpayers. However, under the new mechanism, though clarifications are issued by the board (CBDT), the same is sought to be made binding on the taxpayers also. This appears to be incongruous with the prevailing position in law,” the representation said.

Source By: economictimes