Since its presentation on February 1, the Union Budget has witnessed extensive scrutiny by experts. An aspect which, however, has not received enough attention is the post-facto amendments to tax provisions undertaken ostensibly to overcome various High Court and Supreme Court rulings. These rulings either adversely impacted revenue collection or did not suit the policy commitments of the Government.
In the Income Tax Act, 1961 (IT Act), the most prominent amendment is the retrospective withdrawal of the allowance of depreciation claim on goodwill as expenditure by amending the definition of a block of assets to exclude ‘goodwill of business or profession’. Hence, goodwill shall no longer remain a depreciable intangible asset. The intent evidently is to overturn the SC decision in Smif Securities (2012)wherein it has inter-alia been held that the benefit of deprecation can be claimed on goodwill as an asset. All along, goodwill has been recognized as an important asset commanding value, and depreciation on goodwill has been an essential element in calculating the post-tax return of an acquisition proposal. The denial would severely impact pay-back calculations in every future commercial M&A deal.
The expansion of the definition of ‘slump sale’(sale of a business or its division as a going concern) to include any transfer in lieu of non-monetary consideration is also of significant consequence. This amendment overturns the Bombay High Court ruling in Bharat Bijlee (2014) and the recent Madras High Court ruling in Areva T&D India (2018)wherein the Courts have consistently held that slump exchange without monetary consideration cannot be treated as a sale and no capital gains are attracted on such transaction. Hence, going forward, scenarios of business restructuring involving inter se or otherwise the exchange of business verticals between the groups would qualify as slump sale. Absent any prescribed guidelines for valuing non-monetary consideration, determination of capital gains may pose challenges for the business. In order to avoid any future disputes on this count, the Government should also prescribe valuation guidelines at the earliest.
On the distribution of money to a retiring partner of a partnership firm, it has been the consistent view that such distribution does not attract capital gains tax in the hands of the firm. This position has been endorsed by Karnataka and Bombay High Court in Dynamic Enterprises (2013) and Electroplast Engineers (2019) wherein it has been held that mere distribution of money to retiring partners does not attract capital gains tax firm’s hands. However, the amended law provides that where a partner/ member of the firm/ AOP receives any capital asset or money or another asset at the time of dissolution or reconstitution, which exceeds the balance in their capital account firm/ AOP at the time of dissolution or reconstitution, shall be taxable.
Far-reaching post facto amendments have also been made in-laws of Goods & Services Tax (GST) and Customs. For instance, the supply of services/goods between a person (other than individuals) and its members or constituents have been retrospectively brought under the definition of supply for levying GST. This in effect overrides the common law doctrine of mutuality, which, has been liberally used in Indian courts to successfully argue that there cannot be self-supply of services between members and associations, liable to tax. In a number of rulings, the Supreme Court has endorsed this view. In fact, on the basis of mutuality doctrine, a three-judge bench of the Supreme Court in Calcutta Club (2019)had inter-alia upheld that no sales tax or service tax was leviable for supplies by incorporated clubs to its members. The membership fee collected by the clubs, associations, etc. is now liable to GST.
Central Sales Tax (CST) Act has also been amended to provide that issuance of Form C for procurement of petroleum products will be available only to such entities who are engaged in either resale or manufacture of petroleum products. Earlier, entities would procure petroleum products at the concessional rate of 2% against Form C. However, for future purchases, they will have to pay the full VAT of 30%-40%. As petroleum products are the primary fuel for many entities, procurement at full rate will result in substantial capex cost. Interestingly, the tax authorities have been denying Form C to manufacturing entities who procured petroleum for use as fuel. The High Courts of Bombay and Delhi in Asahi India Glass (2019) and Tata Steel BSL (2020) respectively has disapproved the approach of the tax authorities and had allowed the use of Form C for procurement of petroleum products as raw material/fuel by manufacturing entities even though they did not deal in petroleum products. The amendment clearly undoes the High Court rulings.
A welcome amendment is the removal of ambiguity on account of Customs IGCR Rules which disallowed the concessional rate of Customs Duty on goods transferred by the principal manufacturer to the job worker for the manufacture of finished goods. It has been consistently argued by the manufacturers that the purpose for a concession is to promote manufacturing activities in India and since it is met even if the importer/manufacturer transfers the goods to a job worker, the benefit should be permissible. Contrary to this argument, in Panacea Biotech Limited (2003), it was held that the word factory will mean only the factory of the manufacturer and not the factory of a job-worker. However, in the case of Tamil Trading Corporation (2005), the Tribunal took a view divergent view. The amendment will surely put the controversy to rest and shall ensure enjoyment concessional rate of Customs duty by principal manufacture in case of goods sent to job workers.
The certainty of a tax position is key to business investor confidence. In India, ironically, post facto amendments to overcome tax rulings are an annual feature of the yearly Budget. Keeping with its avowed policy of ‘ease of doing business, Government should desist from such act in its annual budget.
Kumar Visalaksh & Rahul Khurana are Partner and Associate Partner respectively at Economic Laws Practice (ELP) Delhi. Research inputs by Saurabh Dugar, Associate Manager. The Authors can be reached at email@example.comfirstname.lastname@example.org