If the whole world is looking upto India as their prospective market, then how can our Indian economy crash?

Is the slow down of economy man-made or natural ?

During Demonetisation , I had tried to explain the concept of “Velocity of Money” through an animated Video and had stated that the success of demonetization would depend largely on the effect on the velocity of money in the post demonetization period.

In this article, I would like to extend my views on the present state of economy in continuation of the said video.

Though the good “political intent” of the present Government cannot be denied and most of their actions are steered towards the best interests of the nation, but it also seems that the Government lacks smart and intelligent advisors  leading to slow down of economy.

One biggest blunder which the present Government is making is the assumption of “complete parallel economy”

We need to understand that parallel economy is just theoretical and “physical money” or “cash” per se cannot be black or white.

Money on the move has no fixed abode. From one wallet to another, from one shopper to the next, from one bank account to another, that is the life of money. 

“Cash/Money in Bank” has a peculiar feature compared to other assets. If a Machine is transferred through 12 people in a year, it will still give almost the same level of production, but this is not so in the case of money!
When Rs. 2000 Note flows in an economy hundred times in a day, it gives 100 people satisfaction while going home that they have earned Rs. 2000/- and applied the same in stuffs which gives them happiness and the total value is worth Rs. 200000 showing signs of a healthy economy

But it is natural that out of these 100 people transacting in money, some 90 people may account for the money transaction and some 10 may not account for the same but the Government needs to realize that in order to not allow these 10 transactions going unaccounted – the stopping of the flow of all the 100 transactions is not the solution which ultimately leads to economic slow down and getting the remaining 90 people to go out of business !

Let me explain this with a real life example.

Lets say, when a consumer “A” may buy Jewellery worth Rs. 2,00,000 in cash, “A” may be using his unaccounted money but the receiver Jeweller “B” deposits cash into bank by invoicing it in the name of some “X“ and pays due income tax on the same.

Now the the jeweller B subsequently pays its job-worker “C” for their job charges by account payee cheque and after deduction of 1% TDS which ensures that job worker shall pay taxes on the same and out of their job-charges credited in its bank, “C” would pay salary to its individual employees “D” by cheque who shall also file their returns. The individual employees “D” shall now use this amount to consume various services like petrol , e-commerce shopping while making digital payment through Mobile wallets and hence these moneys are always accounted.
Now assuming that whole trail of money transaction as described above has happened on the same day, A,B,C and D all would go home happy and the value of Rs. 2,00,000/- would be Rs. 8,00,000/- at the end of the day and the Government would also get its share of direct and indirect taxes on each transaction total amounting to Rs. 8,00,000/- . The only Revenue leakage was the tax lost on the source from which person A has earned Rs. 2,00,000/-. Sometimes, even “A” who has accumulated past savings does not know whether the amount spent by him on buying jewellery is black or white and as I said , the biggest mistake which the present Government is doing is the doubting of the very first transaction of consumers like “A” who then loses his purchasing power due to tax terrorism and uncertainties in law and which ultimately results into lower velocity of money because none of the transactions shall happen.

In other words, earlier the Rs. 1000 Note used to travel something like this in an Indian economy.

BLACK, WHITE , WHITE , WHITE, WHITE , WHITE, BLACK, WHITE...

However, due to immature steps of the present Government during the post demonetization period and the hasty implementation of GST, the new Rs. 2000 Note now travels in the following fashion

BLACK, IDLE, IDLE, IDLE IDLE, IDLE , IDLE , BLACK, IDLE ,IDLE… 

And this has lead to massive recessive and liquidity crunch wherein the businessman are sitting IDLE!

While some notable reforms are made by the Government through the introduction of RERA and implementation of Insolvency and Bankruptcy Code which were necessary irrespective of its negative effect on the velocity of money, but as a Chartered Accountant practising into Income Taxes, if I am to suggest one step to increase the speed of money which will automatically boost the economy, it shall be the –

“Removal of the draconian provisions of Section 115BBE under the Income Tax Law which was amended during demonetization in a very insensitive manner”

The citizens of India has not yet tasted the venom of this amended draconian law of Section 115BBE because it is made applicable w.e.f A.Y 2017-18 and the scrutiny of the cases of the said year are under assessment and the ill-results as envisaged by me shall come by December 2019 if corrective steps are not taken.

What is Section 115BBE ?

Section 115BBE of the Act, as amended by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. A.Y 2017-18 states that if a taxpayer fails to prove the nature and source of credit in its books of account or the explanation offered by him in respect of any credit is not satisfactory in the opinion of Assessing Officer, he shall be liable to pay effective tax at the rate of 77.25% even if he has offered the said income in his return of income !

For example, lets say that one of my friend “V” started teaching CA students and in pursuance of this noble profession, he  received fees of Rs. 11,00,000/- in cash which he deposited in the bank account and offered the same for taxation in his return of income as tuition fees. Now at the time of income tax scrutiny, the provisions of Section 115BBE shall vest the Income Tax Officer with unfettered powers to reject any explanation, being not to his satisfaction. After two years, my friend may be asked to produce the parents of the students before ITO to record their statement. The parent shall be asked to show the entry of tuition fees paid in their books of accounts and in order to save his skin, the said parent would never turn up to confirm the transaction or say that his son never studied under that teacher. Ultimately, my friend “V” shall be asked to pay flat tax of 77.25% on his income of Rs. 11,00,000/-

On the contrary, my other friend “U” who claims to have won Rs. 11,00,000/- from casino and betting will just pay tax at the maximum rate of 30%.

This provision of Section 115BBE shall affect any taxpayer into any business where there are cash sales involved and the Income Tax Officer has suspicion that the cash is not arising out of regular business.

In case of earlier example of Jeweller “B”, now B has to file confirmation from customer A ( which is unlikely) and on failure to do so, the Government shall fasten B with 77.25% tax. Thus by resorting to such harsh measure, the Government is stopping the whole flow of money from A to D to all leading to decrease in the velocity of money and rather the above provision is encouraging the parallel economy as now the jeweller B shall not deposit the said cash in his accounts though it wants to pay tax ( at 30% and not 77.25% ) and now the money will always remain black money and even the Government will lose its share at each time the money flows from one person to another.

Talking about corruption, the mentality of present tax-payers of “New India” is such that if an option is given to them to pay 30% tax or to pay bribe and reduce tax to 0% , I am very confident the citizens of New India would opt to pay 30% tax because they trust this Government blindly and they trust that the Government shall use their hard earn tax money for the betterment of the nation. But when the same Government themselves shall make laws to make the scenario – 77.25% or 0%, the Government is either spreading tax-terrorism or is indirectly encouraging corruption because the taxpayer is left with no other option to save his hard earned money and more importantly to buy peace of mind but to succumb to the wishes of a Babu.

There are series of such poor decisions lately by the Government like 100% penalty for transactions in cash for more than Rs. 2,00,000/- , taxing the profits of corporate thrice leading to effective tax rate of 50% on profits of Companies, poor implementation of GST etc which has lead to decrease in velocity of money and liquidity crisis and ultimately slow down of economy.
No doubt, there are natural factors in addition to the above, which are attributable to economic slow down.

It is true that the businesses have not slow down but the business model have changed. The valuation of Airbnb which does not own any properties is much more than Hilton or Marriot. The Valuation of Uber or Ola which does not own any taxi is much more than any Company in the world owning fleet of taxis or self drive cars.

We have moved from
“We sell Cars” to “We transport”.
“We run Private Schools” to “We educate”
“We trade” to “We make markets”

and thus every Indian businessman has to accept this change and bring an innovation in its products, process or Services. The present Government is doing an excellent work in encouraging innovation through its flagship programme “Startup India”. India with its 22k Startups is heading towards becoming one the largest Startup ecosystem in the World and Government has supported these Startups right from the launch of its Scheme.

The popularity of our PM is unmatchable. The present Government has got the greatest mandate ever in history of India and hence it is expected from the Government to grace its mistakes, be open to public discussion, take external advisory from Research Institutions or opposition leaders, where needed and take corrective actions for decisions which has gone miserably wrong.

PS : Become part of the movement to send a message to the Law makers about the ill-effects of Section 115BBE by signing this petition on change.org at http://chng.it/nNkxbhcK. Also you may share this article through Facebook/ Whatsapp or Retweet from my Twitter handle camehul87 to spread awareness.

In FY 2018-19 and 2019-2020, many taxpayers have received notices from Income Tax Department proposing to tax the total surrender value received on account of Designated Unit linked insurance policies in the nature of pension without any sum assured or death benefit. The taxpayers are perplexed because at the time of investment in such insurance plans, they believed that such policies shall be fully exempt at the time of receipt but now notices are received for reopening the cases u/s 148 and taxing the total surrender value or maturity value at relevant tax rate.

There are instances where even if the total surrender value receipts is almost same as amount of premium paid and despite the fact that there is no profitability, the tax officials are demanding tax on the entire maturity proceeds/surrender value without giving any deduction of premium paid by citing the provision of Section 80CCC(2).

Hence, this article is written to provide an opinion as to how such situations can be dealt with.

First of all, it is true and to be known that exemption in case of ULIPs in nature of pure pension is not available u/s 10(10D) on surrender of such plan where there are no mortality charges and no sum assured attached to the policy and hence the provisions of Section 80CCC(2) are clearly attracted.

Now, the Provision of Section 80CCC is relevant which is reproduced here:

80CCC (1) Where an assessee being an individual has in the previous year paid or deposited any amount out of his income chargeable to tax to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund referred to in clause (23AAB) of section 10, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount paid or deposited (excluding interest or bonus accrued or credited to the assessee’s account, if any) as does not exceed the amount of one hundred and fifty thousand rupees in the previous year.

(2) Where any amount standing to the credit of the assessee in a fund, referred to in sub-section (1) in respect of which a deduction has been allowed under sub-section (1), together with the interest or bonus accrued or credited to the assessee’s account, if any, is received by the assessee or his nominee—

(a)  on account of the surrender of the annuity plan whether in whole or in part, in any previous year, or

(b)  as pension received from the annuity plan,

an amount equal to the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in that previous year in which such withdrawal is made or, as the case may be, pension is received, and shall accordingly be chargeable to tax as income of that previous year.”

Now the following argument may be raised before the tax officials:

As per Section 80CCC(2) of IT Act, the taxability shall arise only in respect of amount credited in respect “of which deduction has been allowed” and hence if no deduction is claimed on account of premium paid on impugned policy, and the surrender value is less than total premium paid then the provision of Section 80CCC(2) cannot be invoked.

For Example, lets say ‘A’ has taken a policy for 5 years with premium of Rs.1,00,000/- to be paid every year. However, A surrenders the policy before completion of term of 5 years and receives Rs.4,50,000/- as surrender amount against the premium paid of Rs. 4,00,000/-. Now, if ‘A’ has not taken any deduction of premiums paid for the respective years, then  the surrender amount of Rs.4,50,000/- on receipt should not be fully taxed as one may argue that the provisions of Section 80CCC(2) is not invokable for the reason that no deduction is taken for the premium paid.

In this case, an interesting scenario may arise, where the assessee had made investments in PPF of Rs.1,50,000/- and in pension plan to the tune of Rs.1,00,000. In the return of income, deduction upto Rs.1,50,000/- is only allowed as per Section 80CCE [cumulative deduction of Rs.1,50,000/- allowed under Section 80C, 80CCC and 80CCD(1)] and so it is not discernible  whether deduction of Rs. 1,50,000/- was claimed in respect of pension plan or PPF and hence it can be argued that deduction was taken only for PPF and 80CCC(2) is not applicable as no deduction is claimed in respect of pension plan

Another scenario arises where deduction is claimed but not fully say for example deduction taken was only Rs.70,000 for pension plan and no other eligible deduction available thereby the limit of Rs.1,50,000/- was not fully absorbed, in such cases, Assessing Officer may take a view that the entire receipt from insurance is fully taxable as once deduction was taken, Section 80CCC is invokable and no separate deduction is available as per provision of Section 80CCC(2). However according to our view only the amount of deduction earlier claimed along with bonus and interest should be taxable.

Emphasis is also laid on Circular no.7/2003 dated 05.09.2003 wherein it was clarified that, “The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.”

Though the above Circular was for earlier Section 88 of IT Act which now stands substituted by Section 80C w.e.f 2006 and hence the ratio of Circular would be equally applicable in the given scenario.

Regarding the applicability of provision 80CCC(2) reference may be made on the decision of ITAT Mumbai Bench in case of Sandeep Sukhtankar vs ITO [ITA No.2690/Mum/2012] dated 18.06.2014 wherein it was held that,

“We  have  heard  the  rival  submissions. AO  had  admitted  that  the  assessee  had  not  claimed deduction under the provisions of chapter VI A of the Act,that he had had received an amount in dispute  by  surrendering  lifetime  pension  policy  and  life  insurance  policy  from  ICICI  Prudential life  insurance. These  two  factors  in  themselves  are sufficient  to  hold  that  money  received  by  the assessee is a capital receipt and not taxable. Provisions of section 2 of the section 80CCC are very clear. In light of the said sub section, we decide ground no.4 in favour of the assessee.”

Alternatively, it can even be argued that the investment in such ULIP is capital asset because the definition of capital asset is exclusive definition defined as follows:

 “Section 2(14) capital asset” means—

(a)  property of any kind held by an assessee, whether or not connected with his business or profession;

(b)  any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992),

but does not include—

 (i)  any stock-in-trade other than the securities referred to in sub-clause (b), consumable stores or raw materials held for the purposes of his business or profession ;

(ii)  personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—

(a)  jewellery;

(b)  archaeological collections;

(c)  drawings;

(d)  paintings;

(e)  sculptures; or

(f)  any work of art.

Explanation 1.—For the purposes of this sub-clause, “jewellery” includes—

(a)  ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b)  precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

The definition of capital asset specifically excludes certain items and insurance policies does not fall under the exception given and hence accordingly, the benefit of indexation and deduction on account of cost of acquisition should be made available.

Section 80JJAA of Income Tax Act Background

Section 80JJAA of income tax act was introduced to provide incentives to industries to generate employment for semi-skilled and unskilled labours. It was amended by Finance Act, 2016 and again under Finance Act, 2018. We have summarized important provisions as below.

Eligibility for claiming deduction under Section 80JJAA

• Assessee should be subject to tax audit u/s. 44AB of Income Tax Act and has profit or gains from business.
• Business should not have been formed by splitting up or by way of reconstruction of an existing business. A business formed by re-establishment, reconstruction or revival by the assessee of the business u/s. 33B can claim this deduction.
• Business should not be acquired by way of transfer from any other person or as a result of any business reorganization.

Amount of Deduction under Section 80JJAA

One can claim a deduction of an amount equivalent to thirty per cent of additional employee cost for three assessment years. This means that in each three years entity is eligible to claim the deduction of 130% of the employee cost paid to new employees.

Additional Employee Cost is the total emoluments paid or payable to surplus employees employed during the last year.

Additional cost shall be NIL, if:

• there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year
• emoluments are paid otherwise than by an account payee cheque or account payee bank draft or bank transfer

Additional employee cost eligible for deduction under section 80JJAA of Income Tax Act will be Rs. 1,17,87,600. (188 employees*Rs.19,000*11 months*30%).

• an employee whose total emoluments are more than twenty-five thousand rupees per month
• an employee for whom the entire contribution is paid by the Government under the Employees Pension Scheme
• an employee employed for a period of less than two hundred and forty days* during the previous year
• an employee who does not participate in the recognised provident fund

*In case of the business of manufacturing of apparel or footwear or leather products, two hundred forty days is substituted with one hundred and fifty days.

It has been clarified that where an employee has not been employed for a period as mentioned above in a financial year and completes the minimum period of employment in next financial year, he/she shall be deemed to have been employed in the succeeding financial year and benefit of this section can be taken accordingly.

Examples

XYZ Pvt. Ltd. is incorporated on 30th June 2015 and engaged in the business of manufacturing. It had 250 employees as on 31st March 2018.

a) During the financial year 2018-19, 70 new employees were employed and 20 employees (old and new) resigned before 31st March 2019. Employees as on 31st March 2019 will be as follows:

b) The company employed 15 new employees during the financial year 2018-19 out of which 5 resigned. Out of the existing employees, 20 employees also resigned during the year. Increase in the number of employees will be:

c) The company employed 600 new employees during the financial year 2018-19. Also, 60 old employees had resigned during the year:

Total additional employees employed during the year 2018-19 are as follows:

Additional employee cost eligible for deduction under section 80JJAA will be Rs. 1,17,87,600. (188 employees*Rs.19,000*11 months*30%).

Compliance Requirement

An employer is required to obtain Form 10DA from a practising CA for claiming the deduction. The form should be filled before filing an income tax return for that year.

Income tax return has to be filed on or before the due date specified under section 139(1) of the Act.

Issues that require more clarity from Tax Authorities

• Does the threshold limit of days include leave period as well?
• What will happen in case of upward revision of salary in year 2 or 3?
• What is to be considered as emoluments? Whether bonus or non-monetary perquisites be considered for computation of emoluments and whether it is eligible for deduction?

High time to consider tax benefit under section 80JJAA

Considering the March end, this is high time to claim benefits under the Income Tax Act for the financial year 2018-19. Ascertain the tax benefit available for the financial year 2018-19 and obtain a certificate from a practicing Chartered Accountant as per compliance requirement.

For more information on the subject, please get in touch with us.

Also Read:

RCM under GST applies to remuneration to employee director

Ministry of Law and Justice notified The Banning of Unregulated Deposit Schemes Ordinance 2019 vide notification published in official Gazette on 21^st February 2019. It provides a comprehensive mechanism to ban the unregulated deposit schemes and to protect the interest of depositors and matters connected thereto. This bill could not be passed in the house of Rajyasabha however, President given his consent looking at the prevailing circumstances in exercise of powers conferred by clause (1) of article 123 of the Constitution. The said ordinance is applicable immediately (effective from 21^st February 2019). This law will help in tackling the risk of accepting fraudulent deposits and to safeguard the interest of investors. The law has been enacted especially to regulate Unregulated Deposit Schemes after the Saradha and Rose Valley chit fund schemes that shook West Bengal & other states. There are 166 more such chit fund cases where investors lost their monies that have been registered in the last four years. The introduction of this ordinance will regulate and control non-corporate deposit takers who tempt the public at large with lucrative schemes. Definition of “deposit takers” also include any individuals/ group of individuals, proprietorship concerns and partnership firms apart from other recognized legal structures (viz. LLP, companies, societies)

The ordinance defines “Deposit” as an amount of money received by way of an advance or loan or in any other form, by any deposit taker with a promise to return whether after a specified period or otherwise in whatever form. Pursuant to the definition of “Deposit” and exclusions, now any individual or group of individuals cannot take any deposit or loan from any person other than relatives, whereas partnership firms can take deposit or loan from relatives or partners only. However, genuine connection to businesses like an advance for supply/hire of goods, consideration of immovable property, security or dealership deposited for the performance of the contract and supply of capital goods are excluded from the ambit of the ordinance.

The ordinance defines “Regulated Deposit Scheme” as those schemes regulated by SEBI, RBI, IRDA, State Governments or Union Territory Governments, National Housing Banks, Pension Funds Regulatory, EPFO, Central registrar Multi State Co-operative societies, MCA and other regulatory bodies. All other deposits will be considered as “Unregulated Deposits”. No deposit taker shall directly or indirectly promote, operate issue any advertisement soliciting participation or enrollment in or accept deposits in pursuance of an Unregulated Deposit Scheme. It has been further clarified through insertion of explanation in Multi State Co-operative Societies (Amendment) Act that it shall not be entitled to receive deposits from persons other than voting members. Vide amendment of section 45I of RBI Act 1934, an explanation has been inserted stating that the amount accepted by co-operative society from members/ shareholders/ associate members who do not have full voting rights in meetings shall be deemed to be deposit.

Under section 9, the government may designate an authority whether existing or to be constituted which shall create, maintain and operate an online database for information on deposit takers operating in India. As per section 10 of the ordinance, existing and new deposit takers shall intimate the designated authorities about its business in such form and manner as applicable from time to time as prescribed and if the competent authority has a reason to believe that the deposits are being accepted pursuant to an Unregulated Deposit Scheme, it may direct deposit taker to furnish documents/statements as it considers necessary relating to or connected with the deposit.

The ordinance provides for punishment ranging from 1 year to 10 years and fine ranging from Rs. 2 lakh to Rs.10 lakh in case of non-compliance. The ordinance provides for attachment of properties or assets and subsequent realisation of assets for repayment to depositors. Depositors’ have priority to all other debts and all revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority at the time of insolvency.

Conclusion

As per the literal reading of ordinance, it seems that unless the amount received by way of advance or loan is falling under the exclusions of definition of “Deposit”, then the same is subject compliances prescribed under the ordinance. As can be seen from the preamble to ordinance, the intention of the legislature is to provide for a comprehensive mechanism to ban the unregulated deposit schemes to protect the interest of depositors. It seems that routine business transactions of accepting unsecured loan should be out of ambit of the law. The ordinance further gives power to the Government to exempt further schemes by notification and one can expect some relief/clarity through notification when final rules are published. Many representations are expected to happen in coming days and it is expected that Government will come up with clarifications in the form of FAQ soon.