Prior to the amendment of the IT Act, introduced by the Finance Act 2022. in case of loans taken from foreign entities, the Indian entity would have to satisfy the taxpayer to the extent of bonafide of the foreign entity. Post the amendment, the Indian entity now also has to provide data and information on the bonafide of where the foreign entity is sourcing funds from.
The Finance Act 2022 has brought in an amendment in section 68 of the Income Tax Act which may hamper the circulation of money within the socio-economic framework of the country.
Recommended ArticlesView All
Maruti Suzuki defends offering discounts after Nomura calls it a 'sign of weakness'
IST3 Min(s) Read
India's cotton exports to shrink close to 30 percent in FY23
IST3 Min(s) Read
Section 68 provides that if any sum is credited in the books and the taxpayer does not offer an explanation about such sum credited or if the explanation is not satisfactory then such sum is liable to be credited to the taxable income of the taxpayer. The idea behind the amendment has been to check black money which is routed back in the system through an intricate structure created by making a network of shell companies.
So far the settled legal principle is that under section 68, the taxpayer needs to prove the identity of the creditor along with his creditworthiness and also the genuineness of the transaction in respect of the loan taken. However, this principle no longer holds good with respect to loans and borrowing and the taxpayer would be required to prove the source of source of his income as well. In other words, if any loan or borrowing is received by any person then the debtor’s sources of income also must be to the satisfaction of Tax authorities and the onus is on the taxpayer to satisfy the Tax authorities.
This amendment casts a very unfair onus on the taxpayer to provide financial records of the third party. There can be cases where the third party is unavailable or unwilling to cooperate, this amendment expects knowledge and control of affairs of the third party. Such cast of unfair onus does not even find a place in stringent acts like Benami Transactions Act. This amendment assumes that each loan transaction has an intention of evading tax and unless proved to the satisfaction of Tax authorities otherwise tax should be imposed. Though in genuine cases it is not difficult to do so, there is a great possibility that even in genuine cases also taxpayer is unable to provide a satisfactory reply to Tax authorities and hence runs the risk of paying tax on loan borrowed.
Normally, this kind of onus is cast underacts that are punitive in nature and authorities already have information or any other material in their possession against the taxpayer. Also, the tax rate applicable on income charged under section 68 is 83.25% other than the liability for interest on such tax which is payable in all cases due to time taken in completing assessments. Hence, an individual might end up paying tax more than the amount of loan taken. This amendment has been brought in due to the difficulties faced by tax authorities to adequately investigate and break down the complex structures of shell companies that are formed to conduct the business of accommodation entries. In this regard, it is interesting to note the quote in an interview given to Bloomberg Quint by Mr JB Mohapatra, Chairman of CBDT saying that.
“Life is difficult for an investigator in the income tax Tax authorities or any other agencies precisely because a whole set of entry providers are operating in grey, and in dark areas of the economy. They are introducing illicit cash and making investments through a layering of various accounts. Entry of cash from one end and through a layering of 14, 15 or 17 bank accounts appearing as a cash credit in the 18th account. It's a very onerous task of going to the real source of the deposits or the real source of that deposit in somebody's account.”
In other words, it is in the inability of the Income Tax authorities to investigate entry providers due to which such onus is cast upon all the assesses. Though it can be appreciated that Tax authorities have many challenges to face to demystify the complex network of shell companies that are created to evade tax and there are many other difficulties in completing assessments against such companies. However, such issues cannot be a justification for putting an unfair onus on the taxpayer for being accountable for books of the third person. Instead, Tax authorities should make effort to strengthen the investigation mechanism rather than bring such an amendment. It seems that this amendment may prove to be counterproductive as no amount of rigours of law can replace a thoroughly investigated case. Also, Tax Authorities are already armed with powers of search, seizure, survey etc which can be used to unearth companies operating in an arena of accommodation entries.
A similar provision already exists in the case of Share Capital. But Share Capital and loan stand on a very different footing. If someone subscribes to a share of a company then many legal formalities are performed and in the process, evidence is created. However, this amendment covers all loan transactions including loan transactions between two individuals also and in respect of loan transactions between individuals no such formalities are prescribed under law hence it might be difficult to produce the documents as in many cases, loans are granted on a personal basis without any documentation.
Now under this provision, anyone providing a family loan will not only have to offer the loan but also details of their fund to its authorities or in many cases, the borrower may not cooperate with the borrower.
The government has introduced many provisions for the benefit and also to promote start-ups as the government intends to build a strong ecosystem for the growth of this sector however while introducing this provision government has become unmindful of the fact that an entrepreneur at the initial stage of the project needs funding from any possible available source. The impact of this change will be that now entrepreneurs seeking debt funding will also be required to collect documents to prove the source of income also from the person providing the loan, which the latter might not be too comfortable in sharing, thus reducing the chances of the start-up to raise the money. In today's environment where the finance sector is opening up and there are many avenues in the unorganised sector to raise finance, such provision may create a hamper in many cases.
This provision is also contrary to the government's agenda of trust-based governance. Recently, the finance minister has stated that start-ups have emerged as drivers of growth for our economy. The government has capped the surcharge on long term capital gains on unlisted equity to 15% which is similar to long term capital gain on the sale of listed equity shares. this has been done with an idea to attract more investments in start-ups and make India “Atma Nirbhar”. Hence, in view of any investor-friendly moves that the government has made, the government should make this provision less stringent or at least carve-out exception for cases, to bring in a certain degree of certainty, which are clearly genuine or in cases where it is unduly harsh or does not affect tax collections or in cases where prima facie the intention is not to evade tax or other cases where a taxpayer would find it difficult to comply with the requirements of this section or where the amount of loan is not substantial.
The author Tejveer Singh is Partner, DMD Advocates
First Published: IST