Taxation Law

[By Prakhar Khandelwal and Rachita Shah] The authors are third year students of National Law Institute University, Bhopal Introduction Almost twenty-five years ago, the world was introduced to the internet, which poised us towards a new era of technological excellency. Today, with cryptocurrencies and its related technology at rise, we are at the starting point of yet another such revolution. The cryptocurrency industry is still in its premature stage, with skewed knowledge available regarding its working which complicates its classification and therefore its categorization under India’s taxation system. Now, while there is no legal definition for “cryptocurrency”, it can be described as: “a digital representation of value that (i) is intended to constitute a peer-to-peer (“P2P”) alternative to government-issued legal tender, (ii) is used as a general-purpose medium of exchange (independent of any central bank), (iii) is secured by a mechanism known as cryptography and (iv) can be converted into legal tender and vice versa”[i] In the recent years, cryptocurrencies are gradually becoming an acceptable digital currency around the world and countries like Russia and Japan are working towards its regulation. As a result, it becomes pertinent to acknowledge the requirement to define the legality and taxability of cryptocurrency in India. The authors shall attempt to lay out the Indian Government’s present position on cryptocurrency as well as provide a brief overview of its treatment under the current taxation regime. The Government of India’s position The Reserve Bank of India, (hereinafter “RBI”) on December 24, 2013[ii], February 1, 2017[iii] and December 05, 2017[iv] had cautioned persons dealing in virtual currency about the potential risks that they are exposing themselves to as well as clarified its non-authorization to any entity dealing with such transactions. These notifications gave rise to a petition filed on October 31, 2017 which demands emergent steps for restraining the sale and purchase of cryptocurrency in India.[v] The case is tentatively listed to be heard on July 23, 2019. On April 6, 2018, entities regulated by the RBI were prohibited from dealing with cryptocurrencies and those which already provided such services were compelled to exit the relationship within three months.[vi] It was against this notification that the Internet And Mobile Association of India (hereinafter “IAMAI”) filed a writ petition on May 15, 2018 in the Supreme Court of India under Article 32 of the Constitution of India.[vii] However, a stay order was not approved for the above notification. Therefore, the April 6, 2018 position subsists today. The case is likely to be listed on July 23, 2019. In November 2017, a panel headed by Economic Affairs Secretary, Subhash Garg had been constituted to oversee India’s policy on cryptocurrency. According to a report released on June 07, 2019,[viii] the bill concerning cryptocurrency which is being looked into by the panel contains a provision for punishment of imprisonment up to 10 years to anyone who deals in cryptocurrency. Therefore, the events between 2013 and June, 2019 strengthen the government’s disapproval to regularising the use of cryptocurrency in India. Treatment under Direct Taxation System: At the outset, it is important to note that the illegal nature of income does not bar its taxability. Therefore, although the Government has consistently disapproved the use of cryptocurrency, it is crucial to have a regulatory framework for its taxation. The Income Tax Department sent notices to individuals for non-declaration of investments in cryptocurrency in early 2018 and emphasized that such investments shall be taxable.[ix] As per the notices, the Income Tax Department levies tax on cryptocurrency under two heads.[x] Firstly, under the head “profits or gains from business or profession” under Section 28 of the Income Tax Act, 1961 (hereinafter “IT Act”) and secondly, under the head “capital gains” under Section 45 of the IT Act. Therefore, since cryptocurrency is not declared as legal tender and “money” by itself is not taxable under the IT Act, the Income Tax Department treats cryptocurrency as “goods” or “property”. i. As profits and gains of business or profession under Section 28 of the Income Tax Act, 1961 The IT Act gives an expansive definition for “business” under Section 2(13) of the IT Act, encompassing any concern in the nature of trade, commerce or manufacture. As a result, profits earned by way of trade in cryptocurrencies falls within the ambit of taxable income under Section 28(i) of the IT Act. Cryptocurrency earned by way of consideration for sale of goods and services as well as when they are held as stock-in-trade comes within the ambit of profits and gains from business or trade. ii. As Capital gains under Section 45 of the Income Tax Act, 1961 One of the modes of acquiring cryptocurrency is through mining. Mining is a method wherein computer algorithms are solved to produce a cryptocurrency. As a result, this cryptocurrency is a self-acquired capital asset[xi] and is taxable under “capital gains” as given under Section 45 of the IT Act. The capital gains tax is either long term or short term, based on the duration for which the cryptocurrency is held.[xii] While the above methods may prima facie seem to solve the confusion among cryptocurrency dealers, one of the primary problems faced by the Income Tax Department and tax payers is the very valuation of cryptocurrency. Since the transactions of cryptocurrency are peer to peer, there is no regulatory authority to control the volatile prices. Moreover, the market for cryptocurrency, although fast expanding, is small and therefore, results in fluctuations in supply and demand.[xiii] The IT Department has not stepped in to explain the computation of its prices. With countries ascertaining their stance on the use of cryptocurrency, the volatility of cryptocurrency may reduce due to growth in the market. Treatment Under Indirect Taxation System Goods and Services Tax, (hereinafter “GST”) which was implemented with effect from July 1, 2017, across India, subsumes most of the indirect taxes, barring few.[xiv] The implications of GST on cryptocurrencies and the Government’s rumoured decision to allow the state to tax it at a maximum rate of 20%[xv]

[Maithry Kini]   Maithry is a 4th year student at School of Law, Christ (deemed to be university), Bengaluru Introduction With the enactment of a new regime for indirect tax certain aspects have become ambiguous. The recent ruling of Karnataka bench of Authority for Advance Ruling (“Authority”)has offered certain clarity with respect to Goods and Service Tax (“GST”) implications on hiving off or demerger transactions. In the application filed by M/s Rajashri Foods Private Ltd[1] (“Applicant”) the question to be determined was whether the transaction of demerger or sale of a unit as a going concern would amount to supply of goods or supply of services or supply of both goods and services. Background of the case The Applicant sought to sell a fully functional unit of the entire business to another distinct person, who would not only benefit from a right over the assets but would take over the liabilities. The facts further convey that the business shall continue as a going concern. On the basis of this fact the Applicant claimed that such a transaction does not amount to supply and that they were exempted from the levy of the tax as under sl. no 2 Notification No.12/2017-Central Tax (Rate) dated 28.06.2017[2] (“Notification”). In order determine the scope and levy of tax it is necessary to examine the meaning of the term going concern and the supply under the Central Goods and Services Act, 2017 (“Act”). Analysis of the term sale as a going concern A going concern is a concept of accounting which implies business as a whole or in entirety. Transfer of a going concern means that the business activities shall continue to be carried out by the transferee as an independent business. This was reiterated in the landmark case of In re IndorRama Textile Limited where the court held that assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future.[3]The Supreme Court in Allahabad Bank v. ARC Holding (“Allahabad Bank Case”) held that if the company is sold off as a going concern, then along with the assets of the company, if there are any liabilities relevant to the business or undertaking, the liabilities too are transferred.[4] Demerger is sale of a business unit as a separate functional unit formulating into a resultant company. The demerger of an undertaking into another separate undertaking is facilitated by transferring the undertaking to a new company on a going concern basis. According to the Income Tax Act, 1971 demerger[5] is defined to be transfer of an undertaking as a going concern. Further the explanation states that there much be transfer of the business as a whole and does not include individual assets of the business. Considering the above explanations with the facts of this case it is clear that the sale of undertaking in this present case amounts to demerger wherein the unit is sold as a going concern and would result into a separate company with distinct identity.   In the present case the Authority while analysing the relevance and scope of the term going concern stated that: “Such transfer of business as a whole will comprise comprehensive transfer of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. It implies that the business will continue in the new hands with regularity and a nature of permanency.”[6] Analysis of the term Supply Section 7(1) of the Act[7] defines supply to include transfer for consideration in furtherance of business.This implies that the activity undertaken is in regular course of the business such as sale or transfer of the asset, should be the effect of transactions in due course of carrying out the business. Therefore the activity to be called as supply should be such that undertaking activity shall amount to “conduct of business or enhancing the business.” Further under Part 4 of Schedule II of the Act[8] referred in the Section states that supply also includesgoods forming part of the assets of a business, transferred or disposed off under the directions of the person carrying on the business. Such assets which are disposed off under such direction or transaction do not part a form of assets of the business. This transaction shall fall under the ambit of supply. It is pertinent to note that there is an exception under the paragraph which specifically excludes business transferred as a going concern to be treated under supply. Therefore, the transfer of a going concern as a whole does not comprise an activity undertaken in furtherance of the business activity. However, the scope of Section 7(1) extends beyond the meaning of the expression in course of furtherance of the business as it further states that it includes imports for consideration with or without any transaction in furtherance of the business. Thus, upon plain reading, Section 7(1) has a wider scope to include even sale as a going concern under the ambit of supply. Further, taking into consideration the Notification that has been relied upon, the table provides for description, rate and condition for levy of central tax. The sl. no. 2 which directly pertains to the subject matter at hand states services by the way of transfer of business. Further the title clearly classifies it as description of services. Irrespective of the provisions under the Act the intention to bring sale of going concern under supply is clear by classifying it under services. Thus the Authority ruled that the sale of business as a going concern amounts to supply and that the Notification shall cover the transaction on the condition that it is sold as a going concern. Conclusion The ruling brings in various excluded transactions under the umbrella of GST regime irrespective of the levy of tax. The Authority in the present case has stepped beyond the provisions of the Act and has heavily relied on the Notification to determine the meaning of supply. Strict interpretation and observance of the provision of the enabling Act must be mandated. Although tax statutes vastly enforce compliance, interpreting

[Anmol Jain]   Anmol is a 3rd year student at National Law University, Jodhpur Introduction Goods and Service tax [“GST”] regime was implemented in India[1] with great hopes and number of positive aspiration, inter alia, removal of cascading effect of multiple indirect taxes, achieving uniform markets, increased regularisation of firms, simplified process.[2] The biggest of the advantage is that it has incorporated the existing indirect taxes imposed by Centre and State Governments on goods and services into a single tax called GST. Also, the compliance burden on businessperson has been eased out under the latest GST Amendment Bills,[3] which was initially pointed out as a disadvantage of the GST regime. Largely, majority of the people support GST for the success it has collected.[4] Further, the absorption of varied indirect taxes into GST has allowed the Government to effectively grant input tax credit[5] [“ITC”] to the manufacturers and businesspersons involved in the supply chain that has led to reduction in tax liability. To illustrate it, Stages Value Addition Tax Rate Tax Payable Final Amount A 100 10% 10 110 B 50 10% 5 165 C 20 10% 2 187   Under the earlier tax regime, the tax was to be paid at the total rate at which the output is being sold and not on value addition. The benefits of ITC are not available to everyone in the market. The law provides for minimum conditions that a businessperson have to fulfil.[6] One such condition is that any businessperson, who is involved in the business of a GST exempted goods, is not eligible for claiming ITC.[7] This provision of law would prove to be instrumental towards the concluding part of this Article. Along the news of successful implementation of GST over the past year came the news of exemption of sanitary napkins from GST.[8] Earlier, GST amount to 12% was levied on sanitary napkins. This development witnessed mixed response from the public. One Section of the society hailed the decision of the GST Council for their progressive outlook and freeing the necessity from the taxing process.[9] On the other hand, people have criticised such tax exemption.[10] I believe that the GST exemption has definitely reduced the cost of the product and therefore, cheering for the lower-priced product does not seem illogical. However, I moot through the course of this article that instead of GST exemption, the tax rate on the product should have been reduced to 5% as exemption brings negative implications on the domestic manufacturers along. Mathematical dig on the Hypothesis During the course of the following calculations, we shall be finding answers for two questions: Does GST exemption reduces the cost of the product? Does GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest? Is GST exemption on sanitary napkins is a viable option to achieve such larger social interest? A Sanitary Napkin [“output”] is a combination of four inputs: Cotton with a GST rate of 5%; Aseptic packing paper with a GST rate of 12% Packaging plastic sheet with a GST rate of 18% Advertisement with a GST rate of 18%. These four inputs are assembled and synthesised together to derive the output. Generally, this industry only encompasses two level supply chain, i.e. one the first level, respective firms supply inputs to the output manufacturer; on the second level, the output manufacturer assembles the inputs to derive the output. To begin with the search for the first question, i.e. does GST exemption reduces the cost of the product, we shall be finding the change, if any, in the cost of the product through calculating the cost of the product in the pre-GST exemption period and post-GST exemption period, wherein the product is produced by a domestic manufacturer. Case 1: Domestic Manufacturer producing at 12% GST (ITC available) Assume that the cost of each input be Rs. 100. Therefore, cumulative input cost be Rs. 400. When such inputs are sold to the output manufacturer, total GST paid is: 5% of 100 (Cotton) = Rs. 5 12% of 100 (Aseptic packing paper) = Rs. 12 18% of 100 (Packing plastic sheet) = Rs. 18 18% of 100 (Advertisement) = Rs. 18 Therefore, TGP = 5+12+18+18 = Rs. 53 Now, assume that the value addition done by output manufacturer during assembling the inputs equals Rs. 47. Therefore, total cost incurred by the output manufacturer equals Rs. 500. Now, if he wishes to sell the product at a profit of 10%, i.e. Rs. 50, the final price [x] of product would be: x = 500 (total cost) + 50 (profit) +12x/100 (GST on output) – 53 (ITC) x = Rs. 565 Therefore, we find that a domestic manufacturer would be ready to sell his output at the cost of Rs. 565 when the output is exempted from GST. Case 2: Domestic Manufacturer producing with GST exemption (ITC not available) If we borrow the costs from the above illustration, Cumulative input cost = Rs. 400 Total tax paid = Rs. 53 Value Addition by the output manufacturer = Rs. 47 Therefore, total cost incurred by the output manufacturer = Rs. 500 Profit = Rs. 50 As there is no GST on the final output, the output manufacturer would not have to add the cost of GST in the final price of the output as well as he cannot claim the benefit of ITC. Therefore, we find that a domestic manufacturer would be ready to sell his output at the cost of Rs. 550 when the output is exempted from GST. If we compare Case 1 and Case 2, it would be safe to conclude that price of the output has decreased when the output was exempted from GST regime. This answers the first question as well that yes, GST exemption reduces the cost of the product. Moving on to the next question, i.e. does GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest, we shall be finding the solution

[Aditi Sinha & Vishal Kumar]   Aditi and Vishal are 2nd year students at Faculty of Law, Delhi University Introduction Direct Tax Code (DTC), was first released in 2009, it sought to substitute the existing Income Tax Act, 1961 and Wealth Tax Act, 1957, through a single effective legislation, aiming towards consolidating the direct tax legislations into one manuscript and enable voluntary tax compliance on part of taxpayers. The existing direct tax law, which deals with personal income tax, corporate tax and other levies such as the capital gains tax, has undergone numerous changes over the years. In September 2017, Prime Minister Narendra Modi told tax officials that old requires certain stringent changes. The idea is to rewrite it in line with the economic needs of the country and to keep pace with evolving global best practices. One key consideration behind such noble move is to ensure that the economy becomes more tax- compliant to generate enough revenue. With a vision to bring tax rates to an equilibrium without squandering the recent gains in revenue growth and tax base, the proposed tax rate cuts will be incremental over a period of time as compliance and revenue collections grow. In this way, it shall try to bring more assesses into the tax net, make the system more equitable and beneficial for different classes of taxpayers, make businesses more competitive by lowering the corporate tax rate and phase out the remaining tax exemptions that lead to piling cases of litigation. It will also redefine key concepts such as income and scope of taxation. Globally, governments are racing to woo investments and boost job creation by offering lower corporate tax rates. Following the traditions of US and UK, India is also trying to improve its rankings in terms of doing business and making herself a better place for investments, hence improving trade, product and service quality.  Direct Tax Code Bill The first draft bill of DTC was released by GOI (Government of India) for public comments along with a discussion paper on 12 August 2009 (DTC 2009) and based on the feedback from various stakeholders, a Revised Discussion Paper (RDP) was released in 2010. DTC 2010 was introduced in the Indian Parliament in August 2010 and a Standing Committee on Finance (SCF) was expressly formed for the purpose which, after having a broad- based consultation with various stakeholders, submitted its report to the Indian Parliament on 9 March 2012. As a follow-up on this initiative and as stated by the Finance Minister (FM) in his Interim Budget Speech in February 2014, after taking into account the recommendations of the SCF, a “revised” version of DTC (DTC 2013) was released on 31 March 2014.  The DTC 2013 proposes to introduce: • General Anti Avoidance Rules (GAAR), • Taxation of Controlled Foreign Companies (CFC), • Place of Effective Management (POEM) rule as a test to determine residency and tax indirect transfer of Indian assets. • Also contains expanded source rules for taxation of royalty, fees for technical services (FTS) and interest. Further certain novel provisions are also included such as additional tax levy on certain persons having high net worth, example: dividend tax levy on dividend income earned by resident shareholders in excess of INR 10 million. It also proposes a tax rate of 35% for individuals/ Hindu Undivided Family’ where the total income exceeds INR 100 million. The new direct tax code will seek to further reduce tax evasion and improve compliance so that the ratio of direct tax to GDP goes up from the present level- 5.9% in fiscal 2018 and a projected 6.1% in the current fiscal year- to at least 9% over the next three to four years. There could be room for further improvement on this count eventually as the tax-to- GDP ratio of comparable economies (including state taxes) is about 24%, roughly half of which should be from direct taxes.  Conclusion The two structural changes in recent years- demonetisation in November 2016 and the rollout of the goods and service tax (GST) in July 2017 have helped the government increase the number of direct tax payers. With increased cross-references between the tax return filings of both GST and corporate taxes, understating revenue is set to become more difficult for businesses. Taxation of digital economy, reducing frivolous litigation and making the corporate tax rate more competitive are expected to be the focus areas of the new code. Direct Tax Code draft bill had 319 sections and 22 schedules at the inception. Whereas the existing Income Tax Act (IT Act) has 298 sections and 14 schedules. Once the DTC bill is passed in the parliament, it will embark the ending of IT Act. The New code will completely modernize and simplify the existing tax proposals for not only individual tax payers, but also corporate houses and foreign residents. The language is very simple. In order to reduce the complexity, the Direct Tax Code has been drafted in a unique manner. Litigant bulwarks are expected to decrease as the code has been drafted in a simple and lucid manner. It shall also introduce the idea of tax calculators. The tax code aims at widening the base of taxation through discontinuation of incentives, reducing threshold limit for companies under transfer pricing, etc., while reducing the taxation rates. In transfer pricing, the law is new for Indians and needs more clarifications. The new code will also recast the powers of the Central Board of Direct Taxes, and induce more transparency in decision making processes. The new code will induce more transparency in decision making and tune it with tax boards of other countries like the US, Canada and Britain.

Comparative Analysis of Anti-Profiteering Laws under GST– Lessons for India. [Ayushi Singh] The author is a third-year student at National Law University, Jodhpur. Anti-Profiteering[1] in relation to the new Goods and Services Tax (GST) regime ensures that the consumers reap the benefits of the tax reductions and the input tax credits (ITC) claimed by businesses in the form of reduced prices. The provision has caused a storm of paranoia amongst taxable businesses. The structure of the provision consists of undefined terms like “commensurate reduction” and ambiguities regarding which ITC claims are applicable under the provisions. Anti-Profiteering Rules, 2017 were notified by the Central Board of Excise and Customs (CBEC), which paved the way for the constitution of the National Anti-Profiteering Authority (NAA).[2] The NAA is duty bound to carry out proper investigations of complaints, identify the aggrieved parties and pass orders against the accused party. Conviction can lead to penalties under the Central Goods and Services Tax Act, 2017, cancellation of registration and orders which direct the concerned party to repay the amount to the aggrieved,or transfer the same to a Consumer Welfare Fund if the aggrieved party is not identifiable.[3] The NAA has been given the reigns to formulate a methodology which will lay down the foundations for directing how changes in the GST regime will translate into price reductions along with guidelines for implementation of this provision.[4] Inspiration for Section 171: Failures of the VAT Regime The qualms created by the roll-out of the VAT and the GST respectively is similar.  The VAT regime made tax-free goods taxable; the introduction of ITC raised questions as to how the benefits could be passed on in the form of reduced prices; and ambiguities relating to translation of tax changes to price changes are the same issues that experts are concerned about presently. The VAT did not have any mechanism in law to crack down on potential profit maximization. Recommendations to create a commission to check price changes were suggested.[5] Unfortunately, the VAT failed to deliver. In a study conducted by the Comptroller and Auditor General of India, the report stated: “Manufacturers did not reduce the MRP after introduction of VAT despite substantial reduction of tax rates. The benefit of Rs. 40 Crore which should have been passed on to the consumer was consumed by the manufacturer and the dealers across the VAT chain.”[6] Hence, this provision is an effort by the Government to rectify the mistakes of the VAT and make businesses accountable to their obligation of providing benefits to the consumer. Post GST inflation has been a trend in Canada, Australia, New Zealand and Malaysia; by controlling unreasonable price changes, this provision would help to curb the inflationary trends of the GST roll-out. On 10 November 2017, the Finance Minister, Mr. Arun Jaitley, declared a reduction in the GST rates of Restaurants from 18% to 5%. However, the failure of restaurants to pass on the benefits of their ITC in the form of reduced prices led to removal of the same.[7] If the government had formulated a methodology to enforce the Anti-Profiteering provisions, misuse of the ITC by restaurants could have been prevented with harsher punishments. Price Exploitation under Australian GST The Australian Competition and Consumer Commission (ACCC) was legally entrusted with the responsibility of formulating a methodology for defining price exploitation and creating corresponding guidelines. Price exploitation is the act of keeping unreasonably high prices.[8] The ACCC formulated the product-specific dollar margin rule, which simply means that if a tax reduction of Rs. 5 takes place in a commodity, this will translate into an immediate proportional reduction of Rs. 5 in the price of the same commodity. No corresponding changes can be added to the GST component of the price.[9] Collaborative guidelines directed retailers to display changed prices conspicuously or through any other declaration as may be.[10] Awareness camps and educational campaigns worked tangentially to make consumers more aware of possibility of price exploitation. GST price hotlines, websites and information bulletins like “Everyday Shopping Guide” helped consumers remain cautious as to exploitative price tampering. However, the objective of the ACCC was solely to deter price changes, not control of price levels and profit margins.[11] This stems from the understanding that in a market economy, the forces of competition and demand will fluctuate prices. The post GST inflation and the costs involved in adjusting to GST regime i.e. staff training, accounting software overhaul have to be adjusted into the price of the supplied commodities. A price margin of 10% was formulated to bring these price variables into the methodology.[12] As long as the prices were within this defined margin and justifiable through invoices, documents, etc, businesses were safe from penal action. Profiteering under Malaysian GST Profiteering is defined as the act of keeping profits unreasonably high.[13] The Commissioner is empowered to set fixed, maximum and minimum prices of commodities[14] and formulate a methodology to define the tenets of profiteering.[15] The 2014 Regulations laid down a strict formulaic methodology wherein net profit margins of businesses during a set period could not exceed the net profit margin as on 1 January 2015.[16] These Regulations were strongly criticized: mainly because of reliance on numbers rather than percentages in measurement of profit margins. The strict crackdown on any change in profit margin brought fear of increased governmental control in the market. In an advisory by Deloitte Malaysia, the companies were advised to “not to increase prices at any stage” in order to reduce one’s risk profile.[17] The 2017 Regulations diluted the procedural strictness and formulaic problems. The amendments decreased the scope of the Regulations to only food, beverages and household goods and changed the formula wherein the profit margin percentage of the same class or same description of goods in a financial year could not be more than the profit margin percentage on the first day of that year.[18] Despite these dilutions, experts in the country opine that the price fixing and control of profit margins are more effective tools of controlling inflation rather than profiteering.[19] Comparison Australia