Startup India Seed Fund Scheme – Switching up The Startup Game?

Priya kejriwal
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Startup India Seed Fund Scheme – Switching up The Startup Game?

What is Startup India?

The Startup India initiative of the Government of India envisages building a robust Start-up ecosystem in the country for nurturing innovation and providing opportunities to budding entrepreneurs.

In a move that endeavors to foster growth and development in the startup sector, the Central Government recently notified a sector-agnostic ‘Startup India Seed Fund Scheme’ (“SISFS”).

The SISFS is projected to disseminate approximately INR 945,00,00,000 (Indian Rupees Nine Hundred and Forty-Five Crores) into the startup ecosystem.

What is Startup India Seed Fund Scheme?

Easy availability of capital is essential for entrepreneurs at the early stages of the growth of an enterprise.

Funding from angel investors and venture capital firms becomes available to startups only after the proof of concept has been provided.

Similarly, banks provide loans only to asset-backed applicants. It is essential to provide seed funding to startups with innovative ideas to conduct proof of concept trials.

Department for Promotion of Industry and Internal Trade (DPIIT) has created Startup India Seed Fund Scheme (SISFS) with an outlay of INR 945 Crore to provide financial assistance to startups for Proof of Concept, prototype development, product trials, market-entry, and commercialization. It will support an estimated 3,600 entrepreneurs through 300 incubators in the next 4 years.

The Hon’ble Prime Minister of India announced the scheme in his Grand Plenary address of Prarambh: Startup India International Summit on 16th January 2021. After approval of EFC and Hon’ble Finance Minister, the scheme has been notified on 21.01.2021.

The Seed Fund will be disbursed to eligible startups through eligible incubators across India. Startup incubators are institutions that help entrepreneurs to develop their business, especially in the initial stages.

e-Book-Startup-India-Seed-Fund-Scheme-2

Background:

Minister of Railways, Commerce & Industry, Consumer Affairs, and Food & Public Distribution Shri Piyush Goyal launched the Startup India Seed Fund Scheme (SISFS).

The Fund aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market-entry, and commercialization.

The SISFS was drafted to address the primary obstacle faced by up and coming startups, which is the lack of access to adequate capital particularly at the product trial/ proof of concept stage.

The SISFS is just one in a series of measures being implemented by the government to bolster the startup sector, for instance, the recent union budget extended the eligibility period for startups to March 31, 2022, to avail the tax exemption under Section 80-IAC of the Income Tax Act, 1961.

The implementation of such measures is of utmost importance given the prevailing market scenario where it is difficult for most startups to raise capital particularly in light of the slowdown caused by the pandemic.

Accordingly, the enforcement of the SISFS comes at the most opportune time and we identify some of the key takeaways from the SISFS.

Key takeaways from the Startup India Seed Fund Scheme

Establishment of an Experts Advisory Committee (“EAC”)

The SISFS envisages the establishment of an EAC which will oversee the implementation and management of the SISFS.

The primary responsibility of the EAC will be to assess and select incubators (who fall within the eligibility criteria specified in the SISFS) with the objective of granting seed funds.

After the incubators have been selected, the EAC will supervise the process of dissemination of the seed funds to the selected incubators. The seed fund will be disbursed by the EAC to the incubators on the condition that certain targets relating to the utilization of the funds are met.

In addition, the EAC is also expected to ensure that the incubators are on the right track in relation to achieving the milestone-based objectives as set by the EAC.

Assistance to Incubators

The EAC shall disseminate INR 5,00,00,000 (Indian Rupees Five Crores) to the selected incubators over a series of milestone-based installments (as determined by the EAC).

The installments will only be disbursed to the incubators upon submission of proof to the EAC that the milestones have been accomplished.

In excess of the seed fund, the incubator will also be provided with a management fee (5% of the total commitment granted to the selected incubator) which is to be utilized for the operational expenditure incurred by the incubators in conducting due diligence and shortlisting Startups.

The seed fund grant provided to the incubator is to be used in full, within three years from the date of receipt of the first installment by the incubator.

Incubator Seed Management Committee (“ISMC”)

The selected incubators that are participating in the SISFS will need to establish an ISMC. The ISMC is an organ that will assess and shortlist suitable Startups for the provision of seed support.

The ISMC shall comprise of a nominee from the incubator who will act as chairman; representative from the State Government’s Nodal Team; representative of a venture capital fund or angel network; a domain expert from the industry; a domain expert from academic; two successful entrepreneurs and any other relevant stakeholder as deemed appropriated by the incubator.

Disbursement of Seed Funds to Startups

The incubators may onward disburse the seed fund to the Startups selected by the ISMC in the following manner:

  1. Up to INR 20,00,000 (Indian Rupees Twenty Lakhs) (milestone based payments) as grant for validation of proof of concept, or prototype development, or product trials;
  2. Up to INR 50,00,000 (Indian Rupees Fifty Lakhs) of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments.

There also seems to be an express prohibition on the Startups to use the seed fund for any purpose for which it has not been granted for.

The amount disbursed by the incubator to the Startup shall not exceed 20% of the total grant provided to the incubator.

Apart from monetary assistance, the incubators shall also equip the Startups with the physical infrastructure and equipment required to develop, research and test product prototypes and offer networking opportunities to the Startups by providing a marketing platform for the Startups to display the products developed to potential investors.

Indicators of Successful Implementation

The parameters for measuring the success of the Startups as assessed by the incubator will include progress of proof of concept; progress of prototype development; progress of product development; progress of field trials; progress of market launch; quantum of loan, angel or venture capital funding raised; jobs created by the Startup; turnover of the Startup and any other parameter as established by the incubator.

The status of progress under each of the above-mentioned parameters will be relayed from the Startup to the incubator and subsequently to the EAC.

Eligibility Criteria of the Scheme

1. A startup, recognized by DPIIT, incorporated not more than 2 years ago at the time of application.

Eligibility Criteria for Startup Recognition:

  1. The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership
  2. Turnover should be less than INR 100 Crores in any of the previous financial years
  3. An entity shall be considered as a startup up to 10 years from the date of its incorporation
  4. The Startup should be working towards innovation/ improvement of existing products, services, and processes and should have the potential to generate employment/ create wealth.
  5. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”.
  6. The startup must have a business idea to develop a product or a service with a market fit, viable commercialization, and scope of scaling.
  7. The startup should be using technology in its core product or service, or business model, or distribution model, or methodology to solve the problem being targeted.
  8. Preference would be given to startups creating innovative solutions in sectors such as social impact, waste management, water management, financial inclusion, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defense, space, railways, oil and gas, textiles, etc.
  9. A startup should not have received more than Rs 10 lakh of monetary support under any other Central or State Government scheme. This does not include prize money from competitions and grand challenges, subsidized working space, founder monthly allowance, access to labs, or access to prototyping facility.
  10. Shareholding by Indian promoters in the startup should be at least 51% at the time of application to the incubator for the scheme, as per Companies Act, 2013 and SEBI (ICDR) Regulations, 2018.
  11. A startup applicant can avail of seed support in the form of grants and debt/convertible debentures each once as per the guidelines of the scheme.

How much seed funding can a startup receive under the scheme?

Seed Fund to an eligible startup by the incubator shall be disbursed as follows:

1. Up to Rs. 20 Lakhs as a grant for validation of Proof of Concept, or prototype development, or product trials. The grant shall be disbursed in milestone-based installments. These milestones can be related to the development of prototypes, product testing, building a product ready for market launch, etc.

2. Up to Rs. 50 Lakhs of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments

3. A startup applicant can avail of seed support in the form of grants and debt/convertible debentures each once as per the guidelines of the scheme.

Analysis and Conclusion:-

The SISFS has been structured to operate like a well-oiled machine with each component (the EAC, the incubator, and the Startups) playing a pivotal role in the holistic game plan.

The efficiency of the sector-agnostic scheme in attaining its objective of bolstering the startup sector will entirely depend on how well the respective organs function in synchronization.

The primary issue with SISFS is that there exists ambiguity concerning several facets of the implementation of the SISFS.

For instance, one of the eligibility criteria for Startups as established by the SISFS is that the “Startup must have a business idea to develop a product or a service with the market fit, viable commercialization, and scope of scaling.”

However, the SISFS does not establish the thresholds for what is to be considered as “market fit” or “viable commercialization.”

This is indicative of a larger problem with the SISFS which is that a lot of discretionary power is wielded by the EAC and the incubators in shortlisting “suitable” incubators and Startups respectively.

At the moment, the initiatives being ushered in by SISFS should be welcomed, however, the success of the SISFS will depend entirely on the administration and operation of the EAC, the incubator, and the Startups which is yet to be seen.

To apply for the scheme, Get in touch with a professional consultant. Drop a Whatsapp at https://wa.me/message/QJG5ISIMSXWZC1

Revision u/s 263 quashed when Cash deposit was examined in original assessment proceedings

Tithi Shah
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Revision u/s 263 quashed when Cash deposit was examined in original assessment proceedings

Pramod Kesharichand Shah Vs. The Principal Commissioner of Income Tax

[ITA No.43/SRT/2018]

Facts of the case

The assessee an individual, filed his return of income on 31.10.2007, declaring total income to the tune of Rs.9,14,884/-. The assesses case was re-opened under section 148 of the Income Tax Act, 1961 and the assessment under section 143(3) was passed on 28/01/2015, determining total income of Rs.9,14,890/-.

Later on, the ld. PCIT has exercised his jurisdiction under section 263 of the Income Tax Act 1961 and observed that assessment order passed by the assessing officer is erroneous as well as prejudicial to the interest of revenue and therefore, a notice under section 263 of the Act was issued to the assessee. The relevenat extracts of the notice are produced below:

“The AO has erred in accepting the claim made by the assessee that the cash deposits of Rs.16,00,000/- in the saving bank account no. xxxxxxxxxx2457 maintained with development credit bank, DCS, Daman Branch came out of land transaction in which the assessee was a confirming party. The AO has accepted this claim without any verification which was required to be made in the facts and circumstances of the case before accepting of the claim. It is further seen that the AO has erred in accepting a cash flow statement prepared and submitted by the assessee showing a brought forward/opening balance of Rs. 824009/- and further deposits of Rs. 9,50,000/- from the land transaction which the AO failed to verify. Almost complete absence of any inquiry on this issue makes the order erroneous as well as prejudicial to the interest of revenue.”

In response to the show cause notice of the Ld. PCIT under section 263 of the Act, The AR of the assessee attended and filed various documents and took adjournment. However, the ld. PCIT, after going through assessment records, rejected the contention of the assessee and held that assessing officer has failed to do proper inquiry in respect of cash deposit in bank account and it is indirectly and prima facie established that the assesses claim, as made before the Assessing Officer, is not correct and cannot be substantiated with help of relevant documents.

AR’s Arguments

The AR of the assessee has contended that reassessment proceedings initiated by the Assessing Officer under section 147 of the Act, is itself not valid; therefore the consequential exercise of the jurisdiction under section 263 of the Act is also going to be invalid. The AR submitted that during the reassessment proceedings, the Assessing Officer asked the assessee to furnish the details of cash deposit of Rs.16,00,000. The assessee submitted reply to AO by giving the entire details and there is no mistake on the part of the assessee in furnishing the details of cash deposit. Therefore order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of Revenue. Hence, the order passed by the ld. PCIT under section 263 of the Act should be quashed.

Findings of the Tribunal

The bench held that during the reassessment proceedings, the assessee submitted the details and the explanations of Rs.16,00,000/- cash deposited in the bank account. Just because the Assessing Officer did not bring this assessment order and has passed order in brief, does not mean that assessing officer has not examined the cash deposit. The assessing officer has applied his mind and passed the reassessment order under section 143(3) r.w.s.147 of the Income Tax Act. Hence, order passed by the Assessing Officer should not be erroneous. The assessee also submitted the details of cash deposit in response to notice under section 142(1) of the Act. The assessee also submitted the copy of the cash book before the assessing officer. Thus, the assessee has submitted the details of cash deposit from his side and it was on the Assessing Officer to examine it.

There is difference between ‘Lack of enquiry’ and ‘inadequate enquiry’. It is for the Assessing Officer to decide the extent of enquiry to be made as it is his satisfaction as what is required under law.

The hon’ble high court of Delhi in the case of CIT v. Sunbeam Auto Ltd. [(2010) 332 ITR 167], held that if there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass order u/s 263 of the Act, merely because the Commissioner has a different opinion in the matter and that only in cases where there is no enquiry, the power u/s 263 of the Act can be exercised. The ld. PCIT cannot pass the order u/s 263 of the Act on the ground that further/thorough enquiry should have been made by Assessing Officer.

Further, it was settled by honorable Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT [(2000) 243 ITR 83 (SC)] wherein it was held that if the A.O. adopts one of the possible courses available in the scheme of the I.T. Act which results in any loss of revenue or when two views are possible and the A.O. adopts one of them with which the C.I.T. does not agree, then it would not be an order prejudicial to the interest of revenue for invoking the jurisdiction u/s. 263 of the Act.

The object of section 263 is to examine whether order passed by the AO is erroneous as well as prejudicial to the interest of revenue. Therefore, based on this factual position, the order passed by the AO under section 143(3) r.w.s.147 of the Act should not be erroneous. We note that Coordinate Bench of I.T.A.T., Kolkata in the case of Plastic Concern vs. ACIT [61 TTJ 87 (Cal)] has held that mere possibility of gathering more material to prove the claim of the assessee wrong would not make the concluded assessment erroneous so long as the ld. A.O. had acted judiciously and conducted enquiries in the course of assessment proceedings. Held, that revisionary jurisdiction exercised by the Ld. Pr. C.I.T. u/s. 263 of the Act was not in tune with the facts and evidences on record duly explained to the Ld. Assessing Officer and verified by him and that being so the order passed u/s. 263 of the Act on such erroneous stand is liable to be quashed.

Quick checklist to complete in April itself

Priya kejriwal
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Quick checklist to complete in April itself

On April 1, the Central Board of Direct Taxes (CBDT) notified all the income-tax related (ITR) forms for assessment year 2020-2021. While you have time to file your returns (for income earned during the FY 21), till July 31, There are a number of tax-related tasks that need to be finished before this important deadline. Here is a checklist for you to see if you have missed something.

Vivad se Vishwas scheme

The deadline for the payment of tax without additional interest under the ‘Vivad se Vishwas’ scheme is 30 April, 2021. The Direct Tax ‘Vivad se Vishwas’ Act, 2020 was enacted on March 17, 2020, with the objective to bring down pending income tax litigations, generate timely revenue for the government and to benefit taxpayers. Make sure to pay the due tax if you have opted for the scheme by the end of April.

Furnishing Form 15G and 15H

Those who are having investment in fixed deposits (FDs) should submit form 15G or 15H as applicable to banks, if their income is expected to remain below the taxable limit. Ideally, this should be done at the start of the financial year, because banks are required to deduct TDS in case your interest income is more than Rs 40,000 in a year. For this purpose, the bank adds deposits held in all its branches to calculate this limit.

Form 15G and Form 15H are self declaration forms for an individual below 60 years of age and those above the age of 60 years, respectively. Some banks also allow you to submit the forms online.

If you own a startup, right time to apply for deduction under section 80IAC

Startup India is a flagship initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities. The Government through this initiative aims to empower Startups to grow through innovation and design.

Tax exemption under Section 80IAC of the Income Tax Act is one of the benefits from the various benefits provided to startups under Startup India Scheme. To get Income Tax benefits in the form of 3 years tax holiday u/s 80IAC , get in touch with your Tax consultant as soon as possible or contact us on https://wa.me/message/QJG5ISIMSXWZC1

TDS/TDC Due date Calendar

30 April 2021 –

  • Due date for deposit of TDS for the period January 2021 to March 2021 when Assessing Officer has permitted quarterly deposit of TDS under section 192, 194A, 194D or 194H
  • Due date for furnishing of Form 24G by an office of the Government where TDS/TCS for the month of March, 2021 has been paid without the production of a challan
  • Due date for furnishing of challan-cum-statement in respect of tax deducted under section 194-IA in the month of March, 2021
  • Due date for furnishing of challan-cum-statement in respect of tax deducted under Section 194-IB in the month of March, 2021
  • Due date for furnishing of challan-cum-statement in respect of tax deducted under Section 194 M in the month of March, 2021
  • Due date for deposit of Tax deducted by an assessee other than an office of the Government for the month of March, 2021

Submission of Form 60/ Form 61

As per Rule 114B, PAN Card No. is mandatory required to be furnished at the time of entering into the following transactions

    1. Sale or purchase of any immovable property exceeding Rs. 5,00,000
    2. Sale or purchase of any vehicle (excl two-wheelers)
    3. Any Fixed Deposit exceeding Rs. 50,000 with any Bank
    4. Any FD exceeding Rs. 50,000 with Post Office
    5. Contract exceeding Rs. 10,00,000 for sale/purchase of specified securities
    6. Opening a Bank Account
    7. Making an application for installation of a telephone connection
    8. Payment to Hotels and Restaurants for a payment exceeding Rs. 25,000

In case a person who enters into any of the certain specified transactions where PAN Card No. is mandatorily required to be submitted, but does not have a PAN Card, he shall file a declaration in Form 60/Form 61.

Form 60 is required to be filed in cases where a person enters into any of the transactions  but does not have a PAN card. Form 61 is required to be furnished in case a person who has agricultural income and is not in receipt of any other income chargeable to income tax.

Due date for submitting the above form is 30/04/2021 for all transaction incurred between the period October 1, 2020 to March 31, 2021

Is our GSTR filed for this month? Check your due dates

*Due date

Purpose

Period

Description
22nd AprilGSTR-3B(Quarterly)Jan-Mar’21Summary of outward supplies, ITC claimed, and net tax payable by taxpayers who opted for QRMP scheme and registered in category X states or UTs#
24th AprilGSTR-3B(Quarterly)Jan-Mar’21Summary of outward supplies, ITC claimed, and net tax payable by taxpayers who opted for QRMP scheme and registered in category Y states or UTs
25th AprilITC-04(Quarterly)Jan-Mar’21Summary of goods sent to/received from a job-worker
30th AprilGSTR-4(Annually)FY 2020-21Yearly return for taxpayers opted into the composition scheme for FY 2020-21

Pay your self-assessment tax

The due date to file the ITR for FY 21 is 31 July 2021, unless the government extends it. However, if there is any tax due at your end on income earned during the FY21, it will continue to attract interest, till you pay the same. So, it is prudent to self assess your tax liability and make the payment to avoid panel interest. This self assessment of due tax is called self-assessment tax (SAT). Once you pay the SAT, you can even file your returns instead of waiting till 31 July.

What are you waiting for? Complete all your checklist before we break into another lockdown.

Till then, Stay Positive, Test Negative!

Re-Registration of Trusts / Institutions [Notification No. 19/2021 dated 26.03.2021] :

CA Yash Kapadia
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Re-Registration of Trusts / Institutions [Notification No. 19/2021 dated 26.03.2021] :

The CBDT (Central Board of Direct Tax) has issued Notification No. 19/2021 dated 26th March, 2021 prescribing the procedure for Registration including re-approval / revalidation of existing Tax Exemption Registrations of Trust or Institutions. All the existing Trusts or Institution registered u/s. 10(23C) / 12A / 80G have to Re-Register with the Income Tax Department.

The new Rules and Forms will be applicable from 1stApril, 2021 and all charitable Trusts and Institutions already registered u/s. 12A or 12AA or 10(23C) and having 80G certificate must apply for re-approval/revalidation of their registration before 30thJune, 2021.

Re-registration u/s. 80G/12A has to be done in Form No. 10A (It seems that the application for registration u/s. 12A and 80G will have to be done separately. The clarification will be needed from the department in this regard as the application form is same for both the registrations). The 80G Certificate will be valid for period of 5 years. The subsequent registration at the end of 5 years shall be done in Form 10AB.

The following documents are required to be submit along with application:

  1. Self-Certified copy of Trust Deed / Memorandum and Article of Association.
  2. Self-Certified copy of PAN Card of Trust / Institution.
  3. Registration Certificate or Certificate of Incorporation (issued by charity commissioner, registrar of societies or registrar of companies)
  4. FCRA Registration Certificate, if registered.
  5. Old Registration Certificate u/s 12A / 80G.
  6. Audited Accounts along with Acknowledgement of Return of Income and Computation of total income for last 3 years.
  7. Note on the Activity of Trust / Institution.
  8. The details of Assets and Liabilities as on the date of Application (if applicable).


Furnishing of the statement u/s. 80G:

From F.Y. 2021-22, every trust / institution registered u/s. 80G shall have to furnish statement of donations based on which the deduction will be available to the donors. The details of donations have to be furnished in Form No. 10BD annually, on or before 31stMay of the subsequent financial year (e.g. the statement for F.Y. 2021-22 will have to be furnished on or before 31.05.2022). Following information shall be required to furnish the statement (Form 10BD):

  1. PAN / Aadhaar Number of the donor.
  2. If PAN / Aadhaar is not available then either the passport No. / Elector’s photo identity / Driving License/ Ration Card/ Tax Payer identification Number where the person resides.
  3. Type of donation i.e. Corpus / Specific Grant/ Others.
  4. Amount of donation.
  5. Mode of receipt – Cash/ Kind/ Electronic modes including Account Payee Cheque / Others.
  6. The certificate in Form No. 10BE to be given to the donor will be available for download from the website of the Income tax Department after furnishing of Form 10BD.
  7. It is important to maintain complete record of all donors including PAN and address from 01.4.2021.

Non-Applicability of ICDS III to Real Estate Developers:

CA Yash Kapadia
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Non-Applicability of ICDS III to Real Estate Developers:

In this article we will discuss the non-applicability of ICDS III to Real Estate Developers and the Real Estate Developers are not required to follow the Percentage Completion Method.

Relevant portion of ICDS III is reproduced as below:

ICDS III – Construction Contracts’ applies the determination of income of a contractors only arising from construction contracts.

As per ICDS III,‘ Construction Contract’ means a contract specifically negotiated for the construction of an asset or a combination of an assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes:

  1. Contract for the rendering of services which are directly related to the construction of the asset, for example those for the services of project managers and architects;
  2. Contract for destruction or restoration of assets, and the restoration of the environment following the demolition of an assets.

So, the plain reading of the above definition clearly suggests that the construction undertaken by Real Estate Developers does not satisfy the above definition as the contract is not negotiated only for the construction of asset rather the Real Estate Developer is a person who constructs the asset as per his own schemes and designs and contracts with the buyer to sell the assets. The transaction between the residential flat purchaser and Real Estate developer is not one of mere construction of an asset or simple sale of goods but rather it is a combined contract for not only construction of the flat as also entire building with common amenities but also for transfer of legal title in the flat.

Prior to the ICDS III, AS – 7 – Construction Contracts was in force and it was also not applied to the Real Estate Developers. To clarify this more, the Expert Committee on ICDS (ICDS Committee) was constituted by the CBDT and the committee had in fact recommended that a separate ICDS should be notified for revenue recognition by Real Estate Developers.Pursuant to that, on 11thMay 2017, the CBDT has released draft ICDS on real estate transactions for public consultation. The draft ICDS on real estate transactions is largely based on ICAI’s Guidance Note on Accounting for Real Estate Transactions. Hence, from the above recommendation of the Expert Committee and on the basis of draft ICDS on real estate transactions as released by the CBDT, the very clear intention of CBDT as well as ICAI is that the Real Estate Developers are not covered by the ICDS III.

The CBDT has also clarified in the FAQ issued on 23rd March, 2017 vide Circular No 10/2017 (Reply to Question No. 12) that this ICDS is not applicable to Real Estate Developers. The Q:12 is as follows:

Q:12: Since there is no specific scope exclusion for real estate developers and Build – Operate – Transfer (BOT) projects from ICDS IV on Revenue Recognition, please clarify whether ICDS III and ICDS IV should be applied by real estate developers and BOT operators. Also, whether ICDS applicable for lease.

A:12: At present there is no specific ICDS notified for real estate developers, BOT projects and leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as may be applicable. The CBDT has tacitly accepted that ICDS III not applicable to Real Estate Developers.

Guidance Note on ICDS issued by ICAI also states that the ICDS III is not applicable to real estate developers. Hence, from all these instances, it is very clear that the ICDS III is not applicable to real estate developers and applies only to the contractors.

Now if we look into the applicability of percentage completion method, the Accounting Standard – 9 and guidance note on real estate transactions are relevant. For determination of the accrual of the income and the sale, the Accounting Standard – 9 read with Guidance Note for Real Estate Transactions is relevant. The Accounting Standard – 9 in respect of sale of goods in the real estate projects is explained in guidance note for Real Estate Transactions which was revised in 2017 by ICAI.

Section 5 of the Income Tax Act, 1961 states that the income is taxable in the year in which the same accrues to the taxpayer. Income is said to be ‘accrue’ when taxpayer has legal right to receive the income and accordingly, payer acknowledges a debt in favour of the taxpayer and hence there is no question of applicability of percentage completion method. Reliance can be placed on the judgment of Apex Court in the case of (CIT vs. Excel Industries Ltd (2013) 358 ITR 295 (SC). As the provisions of section 5 prevail over ICDS, contract revenue can be recognized on satisfaction of the test of accrual and not merely onthe basis of reasonable certainty of collection of contract revenue. This view is also supported by the ICAI’s Guidance Note.

AS-7 relating to construction contracts is not applicable to Developers/Builders so there is no question of recognizing the income on the percentage completion method. In support of the contention,  the decision of ITAT Mumbai Bench decision in case of Awadhesh Builders v/s. ITO [37 SOT 122] is relevant in which the ITAT held that in case of real estate developer, profit is earned only when the space constructed is sold. In case, due to some reasons, the project is terminated or is abandoned, the builder has to refund the advances received from the buyers and in that case, there cannot be any profit because the flats/shops could not be sold as the construction remained incomplete. In that case, it will be only be a case of investment by the builder, profit on which will arise only on sale of flats.

Thus, from the above discussion we can conclude that the ICDS III – ‘Construction Contracts’ is only applicable to the person who is Contractor and not applicable to the Real Estate Developers.

Thanking you.

For any query or assistance, you may reach at ca7@raseshca.com

GST UPDATES IN UNION BUDGET 2021

Arohi Mehta
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GST UPDATES IN UNION BUDGET 2021
GST UPDATES IN UNION BUDGET 2021 The Finance Bill 2021, have proposed certain progressions in CGST Act, 2017 and IGST Act, 2017 to track input credit frauds and to secure Government incomes. Few amendments will be applicable from retrospective effect, while there are further clarifications on the some of the clauses or sections, also some of the sections are amended or added or deleted. The key updates about GST proposed changes in Union Budget’ 2021 are as under:
  1. The following clause or proviso are the new insertion in the CGST Act’2017:
    1. Section 7(1)(aa) is inserted in CGST Act with retrospectively effect from the 1s t July, 2017, so as to ensure levy of tax on activities or transactions involving supply of goods or services by any person, other than an individual , to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.
    2. Section 16(2)(aa) is inserted in CGST Act to provide that input tax credit on invoice or debit note may be entitled only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note.
    3. Section 107(6) is inserted in CGST Act to provide that no appeal shall be filed against an order made under sub-section (3) of sect ion 129, unless a sum equal to twenty-five percent of penalty has been paid by the appellant.
    4. Explanation inserted to sub-section 75(12) of the CGST Act to clarify that “self-assessed tax” shall include the tax payable in respect of outward supplies, the details of which have been furnished under section 37,but not included in the return furnished under section 39.
  2. The following clause or proviso are amended in the CGST Act’2017:
    1. Section 50 of the CGST Act is being amended, retrospectively, to substitute the proviso to sub-section (1) so as to charge interest on net cash liability with effect from the 1s t July,2017.
    2. Section 83 of the CGST Act is being amended so as to provide that provisional attachment shall remain valid for the entire period starting from the initiation of any proceeding under Chapter XII (Assessments), Chapter XIV (Inspection, Search, Seizure and arrest) or Chapter XV (Demand and Recoveries) till the expiry of a period of one year from the date of order made thereunder.
  3. The following changes are proposed in the CGST Act’2017:
      1. Section 129 – Detention, seizure and release of goods
        1. When the owner comes forward for payment of such tax and penalty –He as to pay applicable tax and 200% penalty of the tax payable
        2. When the owner does not come forward for payment of such tax and penalty – He has to pay penalty equal to 50% of the value of goods or 200% of tax payable thereon whichever is higher
        3. Further proviso to sub sect ion (6) has been inserted which provides that the conveyance shall be released on payment by the transporter of penalty under sub-section 3 or Rs . 1 lac whichever is less.
      2. It is hereby proposed to include in zero rated supply –
            1. export of goods or services or both or
            2. supply of goods or services or both for authorized operations to a Special Economic Zone developer or a Special Economic Zone Unit
      3. It is being proposed that option of ‘With payment of Duty” would be allowed only to a notified class of person or notified class of goods or service. Further registered person making supply of goods has to link the foreign remittance with the refund claimed and in case of non-realization of sales proceeds within 30 days from the end of the expiry of time limit prescribed under FEMA Act 1999 would be liable to deposit the refund so received along with the applicable interest.
  4. The following sub-section is omitted in the CGST Act’2017:
    1. It is hereby proposed to omit Sub section 35(5)
    2. And section 44 has been substituted so as to provide that Form 9 and Form 9C i.e. the reconciliation shall be self-certified by the registered person within such specified time as may be prescribed.
Hope this article was useful to you. Stay connected & tuned for more updates.

9 Major Direct Tax Amendments in Budget 2021-22

Vishvas Nandwani
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9 Major Direct Tax Amendments in Budget 2021-22

On 1st February 2021, Finance minister Nirmala Sitharaman introduced the Union Budget for the financial year 2021-22 of which the major Direct tax amendments have been discussed here:

Latest Tax Amendments 2021-22

1. Relief to tax payers on paying advance taxes on dividend:

From 1st April, 2020 the corporate tax was reduced to 25% and subsequently dividend which was earlier exempt upto Rs 10,00,000 in the hands of taxpayer was now made to be taxable. Since this meant that the taxpayers were now required to pay advance tax on dividends which they were not aware of. This attracted interest under section 234C of the Income Tax Act, 1961. Now the section 234C has been amended to include advance tax on dividend only on its receipt.

2. Goodwill has been excluded from Block of Assets

From 1st April, 2021 taxpayers would not be allowed to take depreciation on goodwill as the same has been excluded from the block of assets which means even the goodwill which has been paid for will not be allowed for depreciation under the amendments of Sec 32 and Sec 55 of Income Tax Act,1961.

3. Tax Audit Requirements:                  

From 1st April 2021 tax audit requirements have been changed from turnover of Rs 5 Crores to Rs 10 crores for businesses who have 95% of digitalized transactions. This is a welcome initiative by the government which will ease compliances of small tax payers and promote digital payments.

4. Relief to Senior Citizens

No filing Requirements for Senior Citizen having only pension income and interst income: Senior citizens above 75 years of age and having only Pension and interst income will now be not required to file ITR.

5. Interest and Principal repayment of loans extended to 31st March, 2022

Repayment of principal and interest of home loans can now be availed under section 80C of Income Tax Act, 1961. For joint owners both the owners can obtain the deduction of Rs 1,50,000 each.

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6. Start-ups and innovators:

Start ups incorporated up to April 01, 2022 will be eligible to avail tax holiday. Similarly, capital gains arising from sale of residential property on or before March 31, 2022 and invested by eligible assesses to subscribe the equity shares of an eligible startup will be eligible for tax exemption. Such investment can be made by the due date of filing of return of income of such eligible assesse.

7. Increase in safe harbor threshold between purchase price of house and stamp value


As per Income Tax Act, 1961 homebuyers were taxed for differential between purchase price and stamp value if the stamp duty was more. For this purpose, a difference of 10% was considered normal. Due to Covid-19 as there is  reduction in real estate prices in recent times, this budget proposes to increase the safe harbor threshold from 10% to 20% thus avoiding uncalled for taxation in the hands of the home buyers.

8. LLPs to be excluded from the scope of Section 44ADA i.e Presumptive Income

It is proposed that benefit of the Section 44ADA is not extended to LLP. LLP are required to maintain books of accounts under LLP Act and accordingly, presumptive taxation u/s 44 ADA is not applicable

9. Reduction in Time limit for assessment or reassesment

The time limit for issuance of notice for assessment or reassessment has been reduced as under:

– From six years to three years;

– In cases of serious tax evasion, wherein there is evidence of concealment of income, the notice can be issued upto ten years provided such income is in excess of INR 50 lakh or more. Notice to be issued post prior approval from the specified authority being Principal Commissioner or Principal Director or Commissioner or Director (if three years or less have elapsed from the end of the relevant assessment year) and authority being Principal Chief Commissioner or Principal Director General or where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General (if more than three years have elapsed).

This latest tax amendment will be applicable from assessment year 2021-22 i.e., from April 01, 2021

All public sector companies will now be allowed to carry forward losses and unabsorbed deprecation after amalgamation

Presently the said provisions were applicable only to company/(ies) in the business of operation of aircraft shall now be applicable to any public sector company/(ies) irrespective of its business. In case of amalgamation or divestment of erstwhile public sector company/(ies), through share purchase agreement, on expiry of period of five years, the loss of the amalgamating company/(ies) shall be the loss of the amalgamated company/(ies).

Key Highlights of Union Budget 2021

Priya kejriwal
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Key Highlights of Union Budget 2021
The Union Minister for Finance and Corporate Affairs, Nirmala Sitharaman, presented the first-ever digital budget for 2021-22 on February 1, 2021. The total budget outlay earmarked is 34.83Lakh Crore for the year 2021-22, which is slightly higher than the previous year total budget outlay of 83.50 Lakh Crore. The increased outlay was required to boost the economy and achieve the vision of Atma Nirbhar Bharat, the budget proposals strengthen:
  • The Sankalp of Nation First
  • Doubling of farmers’ income
  • Strong infrastructure
  • Healthy India
  • Good governance
  • Opportunities for youth
  • Education for all
  • Women empowerment
  • Inclusive development
The Finance Minister declared that the Budget 2021-22 stands on 6 pillars:
  1. Health & Well Being
  2. Physical & Financial Capital and Infrastructure
  3. Inclusive Development for Aspirational India
  4. Reinvigorating Human Capital
  5. Innovation and R&D
  6. Minimum Government and Maximum Governance
Let’s walk through each pillar one by one: Pillar 1 – Health and Wellbeing:
  • A substantial increase in the investment in health infrastructure and well being has been proposed in the budget for Rs. 2,23,846 crores as against Rs. 94,452 crores last year which is a 137% increase. This increase was much required post pandemic to beat the recovery rate.
  • A new centrally sponsored scheme called Pradhan Mantri AtmaNirbhar Swasth Bharat Yojna will be launched with an outflow of Rs.64,180 crores over 6 years.
  • Provisions have been made to the tune of Rs. 35,000 crores for COVID-19 vaccines.
  • The government will merge the Supplementary Nutrition Program and the Poshan Abhiyan and launch a Mission Poshan 2.0 to strengthen the nutritional content, delivery, outreach, and outcome.
  • With a proposed outlay of Rs. 2,87,000 crores over 5 years, the Jal Jeevan Mission (Urban) will be launched for universal water supply in 4,378 urban local bodies.
  • A voluntary vehicle scrapping policy to phase out old and unfit vehicles was announced.
Pillar 2 – Physical and Financial Capital and Infrastructure:
  • AtmaNirbhar Bharat Production Linked Incentive (PIL) Scheme has been announced for 13 sectors with a capital outlay of Rs.1.97 lakh crores in the next 5 years starting from FY 2021-22. The scheme aims to bring scale and size in key sectors, create nurture and. Provide jobs to the youth.
  • A scheme of Mega Investment Textile Parks (MITRA) will be launched in addition to the above PIL scheme to make the textile industry globally competitive, attract large investments and create employment. The scheme aims to establish 7 Textile parks in 3 years.
  • The National Infrastructure Pipeline (NIP) announced in December 2019 with 6,835 projects has now expanded to 7,400 projects with around 217 projects worth Rs. 1.10 lakh crore under key infrastructure ministries completed.
  • A professionally managed Development Financial Institution (DFI) is proposed to be constituted for the purpose of infrastructure financing. A sum of Rs. 20,000 crores has been set aside to capitalize the DFI. The DFI establishment will be made with the aim of having a lending portfolio of at least Rs. 5 lakh crore in 3 years’ time.
  • A National Monetization Pipeline of potential infrastructure assets will be launched with the development of an Asset Monetization Dashboard for tracking the progress and providing visibility to investors.
  • It was announced that under the Bharatmala Pariyojana project, more than 13,000 km length of roads has been awarded at the cost of Rs. 3.3 lakh crore of which 3,800 km have been constructed.
  • The government aims to award a further 8,500 km length of roads and complete an additional 11,000 km of national highways by March 2022.
  • The Ministry of Road Transport and Highways received an enhanced outlay of Rs. 1,18,101 crores of which Rs. 1,08,230 crores is for capital (the highest ever).
  • Indian Railways have proposed a National Rail Plan for India 2030 – to create a future-ready Railway network. The Western Dedicated Freight Corridor (DFC) and the Eastern DFC will be commissioned by June 2022.
  • Measures for passenger convenience and safety were proposed.
  • With the view of raising the share of public transport through metro rail and city bus service in urban cities, the government proposed the next few phases of the metro projects will be taken up in metro cities.
  • ‘MetroLite’ and ‘MetroNeo’ – two new metro rail technologies will be deployed in tier 1 and tier 2 cities.
  • The budget also reflected on the launch of a revamped reforms-based result-linked power distribution sector scheme with an outlay of Rs.3,05,984 crore over 5 years. The proposed scheme will assist the DISCOMS for infrastructure development tied to financial improvements.
  • A proposal has been made to merge various allied laws of the securities market to the Securities Market Code.
  • An announcement was made that SEBI will be notified to regulate the setting up and development of the commodity market system in India.
  • The finance minister also proposed to increase the permissible FDI limit from 49% to 74% and permit foreign ownership and control with safeguards.
  • Following divestment transactions are proposed to be completed in 2021-22 – BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, and Neelachal Ispat Nigam Limited.
  • The government also plans on bringing out an IPO of LIC in 2021-22 for which appropriate amendments will be made in the Session itself.
  • The Finance minister confirmed the governmental approval on the policy of strategic divestment of public sector enterprises which was announced in the AtmaNirbhar package.
Pillar 3 – Inclusive Development for Aspirational India:
  • Emphasizing the government’s commitment to the welfare of the farmers, the Finance minister declared that the MSP regime had undergone significant changes to ensure that the price is at least 1.5 times the cost of production across all commodities.
  • The agricultural credit target has been enhanced to Rs. 16.5 lakh crore in FY 2022 by the government to provide sufficient and adequate credit to the farmers.
  • The allocation to the Rural Infrastructure Development Fund has been increased from Rs. 30,000 crores to Rs. 40,000 crores.
  • The Micro Irrigation Fund has been created under NABARD with a corpus of Rs. 5,000 crore would be doubled, augmenting it by an additional Rs. 5,000 crore.
  • Earlier only applicable to tomatoes, onions and potatoes, the Operation Green Scheme will be enlarged to include 22 perishable products.
  • A proposed 1,000 mandis will be integrated with the e-NAM, which already has around 1.68 crore registered farmers.
  • The fishing harbours Kochi, Chennai, Visakhapatnam, Paradip and Petuaghat have been proposed to be developed as hubs of economic activity.
  • The government announced the One Nation One Ration Card Scheme which would allow the beneficiaries to claim rations anywhere in the country.
  • Under the scheme of Stand Up India for SCs, STs and women, margin money requirements have been reduced from 25% to 15% to facilitate credit flow.
  • The government has provided Rs. 15,700 crores to support the MSME sector, which is double the last year’s provision.
Pillar 4 – Reinvigorating Human Capital:
  • The finance minister announced that the reception towards the National Education Policy (NEP) has been largely positive. The budget proposed the addition of more than 15,000 schools to incorporate the elements of the NEP.
  • The budget also proposed the setting up of 100 new Sainik Schools in partnerships with NGOs/private schools/states.
  • The Finance Minister also announced the establishment of a Higher Education Commission of India having 4 separate arms for standard-setting, accreditation, regulation and funding.
  • The government has proposed the establishment of 750 Eklavya model residential schools in tribal, hilly and difficult areas.
  • The central assistance provided under the revamped Post Matric Scholarship Scheme has been enhanced to Rs. 35,219 crores for 6 years till 2025-2026. This will benefit about 4 crore SC students.
Pillar 5 – Innovation and R&D:
  • The government will undertake a new initiative – the National Language Translation Mission (NTM), which aims to bring the government and policy information on the internet to the masses in major Indian Languages.
  • The PSU under the Department of Space, the New Space India Limited (NSIL) will carry out the PSLV-CS51 launch carrying the Amazonia satellite from Brazil along with other smaller Indian satellites.
  • 4 Indian astronauts are being trained in Russia as a part of the Gaganyaan mission activities. The first unmanned launch is expected to be executed in December 2021.
Pillar 6 – Minimum Government, Maximum Governance:
  • The budget proposed to make a number of reforms in the Tribunals for speedy assessments and delivery of justice.
  • The finance minister announced that the upcoming census drive would be the first-ever digital census in the history of India. The budget allocated Rs. 3,768 crore in 2021-22 for the exercise.
  • The fiscal deficit for 2021-22 is estimated to be 6.8% of the GDP as against the revised estimate of 9.5% of the GDP in 2020-21.
  • The government plans to bring down the fiscal deficit below 4.5% of the GDP by 2025-26.
  • The government is permitting the normal ceiling of net borrowing for the states at 4% of the GDP for 2021-22 based on the views of the 15th Finance Commission.
Direct Tax Proposals in the Budget:
  • The Union Budget leaves the direct taxes largely unchanged. The budget provides incentives to ease tax-compliance for the taxpayers.
  • The finance minister announced that the income tax return filers increased to 6.48 crore in 2020 from 3.31 crore in 2014.
  • Individuals over the age of 75 years, who are pensioners, need not file an income tax return (ITR).
  • The establishment of a dispute resolution committee for small taxpayers and a faceless dispute resolution committee for individuals is under works. Anyone with an income of up to Rs. 50 lakh (disputed income of Rs. 10 lakh) will be eligible to approach the dispute resolution committee.
  • The liability to pay advance tax on dividend income will be attracted only after the payment of dividend.
  • Pre-filled tax forms with details like salary income, tax payment and TDS have been proposed.
  • In a bid to provide relief to taxpayers, the reduction has been proposed in the re-opening of the past assessments from 6 years to 3 years.
  • In order to boost the NRIs, the government will notify rules and regulations to eliminate double taxation for NRI on foreign retirement funds.
  • The interest earned by Provident Fund contributions in excess of Rs. 2.5 lakhs will be chargeable to tax at normal rates. This provision applies only to the employee’s contribution and not that of the employers.
  • To incentivize startups, the budget extends the eligibility requirements for claiming the tax holiday by 1 year till March 31, 2022. To further incentivize the startups, Capital Gains exemption has been extended by 1 year till March 31, 2022.
  • The budget proposes to make dividend payments to REIT/InvIT exempt from TDS provisions.
  • The government has proposed to extend the eligibility of the erstwhile tax sop on home loans till FY 2022.
  • In order to ease the compliance burden on charitable trust running educational institutions and hospitals, the government has increased the limit of annual receipts from Rs. 1 crore to Rs. 5 crores for non-applicability of compliances.
  • The budget provides for tax exemptions for the relocation of funds to IFSC.
Indirect Tax Proposals in the Budget:
  • The finance minister proposed to review 400 old exemptions in the customs duty structure this year.
  • A revised customs duty structure free from distortions is proposed to be put forth from October 1, 2021 after extensive consultations.
  • The budget proposed reducing the customs duty uniformly to 7.5% on products of alloy, non-alloy and stainless steel.
  • The budget also exempted the customs duty on steel scrap till March 2022.
  • The budget reduced the customs duty on copper scrap from 5% to 2.5%.
  • An agri-infra cess of Rs.2.50 on petrol and Rs.4 on diesel has been imposed.
  • The budget imposed a 100% cess on alcohol.
Closing remarks: The Union Budget 2021-22 is expansionary. It pushes for infrastructure and healthcare spending with a target to reduce the fiscal deposit without ostensibly raising the tax burden. So, are we headed to the promised AtmaNirbharta? Is the budget really fair? Well, only time will tell. Stay Positive, Test Negative! Happy Investing.

Section 206C(1H): Area of decision making for company management and business owners for smooth implementation of TCS on sale of goods

Mehul Shah
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Section 206C(1H): Area of decision making for company management and business owners for smooth implementation of TCS on sale of goods

TCS provision would apply on all sale consideration (including advance received for sale) received on or after 01- 10-2020 even if the sale was carried out before 01-10-2020.

With effect from 01-10-2020, the Finance Act, 2020 inserted Sub-Section (1H) in Section 206C. This provision is applicable to assessee having turnover of more than 10 Crore in the preceding year and requires a seller to collect tax at source from the amount received as consideration for the sale of goods if it exceeds Rs. 50 lakhs in any previous year. There has been a lot of hues and cry around the implementation of the new provisions of TCS on Sale of goods u/s 206(1H). The ambiguities and confusion surrounding the provisions have led to the issuance of various clarifications vide Circular No. 17/2020 dated 29th Sep 2020 by CBDT and Professionals and Tax Practitioners have added their own clarifications based on judgment and practicality while advising their clients. In this article, I have made an attempt to consolidate the areas of decision making and have tried to approach the issue through a different perspective.

At para 4.4.2(ii) of Circular 17/2020, CBDT has clarified that “this provision applies on receipt of sale consideration, thus the provision of this subsection shall not apply on any sale consideration received before 01-10-2020. Consequently, it would apply to all sale consideration (including advance received for sale) received on or after 01-10-2020 even if the sale was carried out before 01-10-2020”. Though the clarification has been given in respect of another issue, the language of the CBDT’s circular indicates that the tax should be collected when the consideration received during the previous year exceeds the threshold limit. Even otherwise, as per the provisions of law, it is undisputed that the provision of TCS applies on receipt of sale consideration and not Sales ‘per se’ however for administrative convenience, the management of the Company or business owners have to take a call for adherence to any one of the following methodology for the smooth implementation of TCS provisions.

  • 1.Do not pass any entry at the time of Sales on account of the TCS component and Pay TCS at the time of collection.
    • At the time of Sales: Do not pass any accounting entry at the time of Sales on account of the TCS component. You may mention a Note in Sales Invoice that “The Customer shall be required to pay an additional amount of 0.10% (0.075% if the payment is made in FY 2020-21) over and above the Sale Consideration at the time of payment to fulfil the requirement of the provisions of Section 206(1H)” Alternatively, an additional field in Invoice may be given stating “Amount with TCS” but no accounting entry to be passed for the same.
    • At the time of receipt of Sales consideration: A common monthly debit note may be raised for all total Sale consideration received in the name of Customer at the end of the month. The Accounting Software at this point may ask whether the Sale consideration received is inclusive of TCS or exclusive of TCS. Where the assessee selects that Sale consideration is inclusive of TCS, the debit note should be raised by grossing up of the net amount received.
    • For outstanding Debtors as of 1.10.2020: No accounting entry needs to be passed.
    • Reflection in Quarterly TCS returns: The TCS returns may be prepared and filed as per the dates of Debit Notes raised crediting the TCS payable account which should be paid at the end of seven days of next month.
    • Use Cases: In this case, a consolidated entry is passed for each customer whose payment has exceeded the threshold limit of Rs. 50 lakhs which is as per law. This is the best methodology where there are fewer customers with ongoing business who can be trained to voluntarily pay an additional amount of 0.10% at the time of each payment. This method is also apt where the business transactions with the customer are maintained like a current account without any actual one-to-one correlation between Invoice and Payment so payment may be considered as inclusive of TCS and a simple year-end account contra confirmation exercise may be carried out to discuss any mismatch.
  • 2.Pass accounting Entry at the time of Sale on account of TCS but treat it as a parked account and pay TCS at the time of collection only.
    • At the time of Sales: Charge the amount of TCS on Invoice value after GST and mention the total Invoice Amount with TCS separately. In the accounting, debit the customer at the time of Sale and credit the TCS component to separate parked accounts called “TCS to be collected”. This account only acts as a “storage of memory” as a separate variable for a seller because otherwise, we might have to remember the amount to be collected on account of TCS from customers in a separate Spreadsheets and remind them at periodic intervals.
    • At the time of receipt of Sales consideration: After recording the Payment of Sale consideration in the customer’s account, a corresponding entry needs to be passed debiting the “TCS to be collected account” and crediting the same to “TCS Payable”
    • For outstanding Debtors as of 1.10.2020: A debit Note needs to be raised for all outstanding payment subject to the applicable threshold on 01.10.2020 and credited to “TCS to be collected”
    • Reflection in Quarterly TCS returns: The TCS returns may be prepared and filed as per the amount credited to TCS Payable account and not when the amount is credited to TCS to be collected. In fact, ideally “TCS to be collected” is just a control account which may be reversed as on 31st March each year by crediting Debtors account and re-entered on 1st April every year which shall present a fairer view of the affairs of the business. Similarly, reversal entry may be passed in case of Bad debts and so the seller does not end up paying the TCS from his pockets in case of bad debts.
    • Use Case: This method should be adopted by businesses wherein the payment is mostly received on Bill to Bill basis and there are many customers whose accounting Department releases payments only on basis of outstanding dues ledgers and at the same time, the seller does not wish to make payment to the credit of the Government without receiving his own payment from the customer.
  • 3.Pass accounting Entry at the time of Sale on account of TCS and pay TCS at the time of credit to TCS account during the Sale itself.
    • At the time of Sales: Charge the amount of TCS on Invoice value after GST and mention the total Invoice Amount with TCS separately. In the accounting, debit the customer at the time of Sale and credit the TCS component to TCS Component.
    • At the time of receipt of Sales consideration: No additional entry.
    • For outstanding Debtors as of 1.10.2020: A debit Note needs to be raised for all outstanding payment subject to the applicable threshold on 01.10.2020 and credited to “TCS Component”
    • Reflection in Quarterly TCS returns: The TCS returns may be prepared and filed as per the amount credited to the TCS Component account.
    • Use Case: This method should be followed only for administrative convenience when Method 1 and 2 are not feasible or that method disturbs the ease of doing business “more”. Imagine a scenario where the seller has sold goods of Rs. 1 Cr and passed the entry on account of TCS and the outstanding balance as of 31st March is Rs. 40 lakhs and the buyer makes this payment in the next year wherein as per law no TCS is collectible on this payment but the seller would have already deposited the TCS to the credit of the Government giving rise to anomalies.  However, this method may be required to be followed because of the peculiar nature of the Accounting Package used by the business owners or some rigidness in the ERP system where following the earlier stated method may lead to a discrepancy in some other modules of ERP.

Disclaimer:

This publication has been written in general terms and we recommend that you obtain
professional advice before acting or refraining to act on any of the contents of
this publication.

What is TDS on Dividend Income and Its Impacts on Shareholders?

CA Yash Kapadia
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What is TDS on Dividend Income and Its Impacts on Shareholders?
In the earlier tax regime, after corporate tax of 25% to 30% (effectively 33.99% including surcharge and cess), the Company was also liable to pay Dividend Distribution Tax (commonly known as DDT) to the tune of 20.56% (after grossing up) while distributing the same profit to its shareholders or investors while the dividend received was exempt in the hands of the shareholders. In Union Budget 2020, the Honorable Finance Minister Nirmala Sitharaman abolished the Dividend Distribution Tax (commonly known as DDT) and correspondingly made the dividend taxable in the hands of individual shareholders and as a result of the same w.e.f. April 1, 2020, Companies would also be required to withhold taxes at the prescribed rates on dividend paid to its shareholders, depending on their residential status and the documents submitted by them and accepted by the Company.

What is TDS on Dividend Income?

The irony is explained by the fact that, while some categories of equity investors will get the benefit of lower taxes on their dividend income after the DDT abolition, others will end up paying through their nose. Those super rich residential individuals and trusts who fall under the highest slab of 30% with income more than Rs. 5 crore will have an effective tax rate of 35.88% (including surcharge and cess) and would be the biggest losers in the proposed DDT regime. Hence, out of Rs. 100/- earned by the company, Rs. 57.67/- is collectively taken by the government as corporate tax and individual income tax which is very high and results into double taxation and the surplus that remains in the hands of the business person is only Rs. 42.33/-. The dividend received on equity shares and mutual funds which were earlier exempt is now taxable in the hands of investors / shareholders. Further, the government has proposed deduction of TDS on dividend Income distribution as per Section 194 which seems unnecessary as most of the dividend is now directly credited in the bank account of the shareholder through banking channel (ECS) and hence there was no need for that mechanism to check tax erosion. This provision is resulting into another jeopardy as discussed below:

TDS Rate on Dividend Income paid to Resident Shareholders:

Particulars Applicable Rate Documents required (if any)
With PAN 7.5%* Update the PAN, if not done
Without PAN/Invalid PAN 20% –
*A TDS of 10% applies to the dividend income distribution per investor. For FY 2020-21, the rate of TDS stands reduced to 7.5% for dividends paid till 31 March 2021.

TDS on Dividend Income and its impact on Shares lying in Broker Member’s Pool Account:

Due to this amendment, a practical difficulty is being raised for share brokers with regard to shares of their clients lying in their Pool Account on the record date of dividend. Therefore, the brokers receive dividends on behalf of their clients whose shares currently lie in the Pool Account and pursuant to above amendment, TDS deducted by the Companies declaring dividend will also start appearing in 26AS statement of the Brokers although this dividend does not belong to the Broker. Let’s take a hypothetical situation where a share broker receives dividend (against shares lying in the pool account) of Rs.20,000/- pertaining to two clients – Mr. X Rs. 14,000/- and Mr. Y Rs. 6,000/-. Following entries need to be passed in books of accounts by the broker: TDS details So, while filing Income tax return share brokers need to ensure that credit for TDS on clients’ dividend appearing in their Form 26AS is not claimed by them, otherwise the said dividend might be treated as their income which may cause adjustments in their taxable income. Clients get their TDS credit although not appearing in their own Form 26AS. Therefore, it is imperative that brokers keep ready details of their clients’ TDS in such format from the starting so that there are no issues at the time of filing returns from AY 2021-22 onwards. In legitimate situation as described above, when the shares lying in Broker Member’s Pool Account on the record date of dividend, although the TDS would be deducted, it is very likely that the shareholders would not be able to claim the credit as same would not be reflected in their Form 26AS and hence naturally the processing of return of income u/s. 143(1) by the CPC would result into tax demand along with interest giving rise to unnecessary hardship and tax burden on such shareholders. Considering this, the surplus in the hands of shareholders would be only Rs. 35.73/- (i.e. Rs. 42.33/- (less) Rs. 6.60/- TDS as stated above). Therefore, it is high time that the Ministry of Finance takes a apt policy decision so that the tax payer does not end up paying tax twice or thrice on the same profit. A flat rate of tax on dividend at the rate of 10% and scraping of Section 194 would be a wise decision if India really wants to attract investments and wish to encourage local entrepreneurs.  Related: What are the amendments in TDS provisions
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