Business

Provision to curb dividend stripping

QUESTION: What are the changes in the budget which would affect the corporate sector?

ANSWER: Amendment to Sec. 94 is proposed to neutralise dividend-stripping by acquiring shares ex-dividend prior to distribution and booking the loss under the head "short term capital gains". The minimum holding period of nine months can alone avoid the disallowance of short-term capital gains to the extent of the tax-free dividend. Any loss incurred on account of issue of bonus shares or units will also not be allowed, but will be treated as cost on the eventual sale of such units or shares.

Prosecution: Prosecution provision against the companies is further strengthened by the proposed amendment to Sec. 276B nullifying the decision of the Supreme Court in Asst. CIT (Assessment) v Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC), so that even in respect of offences for which mandatory imprisonment is prescribed, prosecution will become tenable subject to the company being made liable only for fine, while its director, manager, secretary and other officers of the company responsible for the offence will be liable both for imprisonment and fine.

There is also a new offence of abetment as an independent offence proposed under Sec. 277A making falsification of records an offence by itself, if it would help tax evasion on the part of any other person, though there is no tax evasion by the person who falsifies his books of accounts. This is already an offence under sections 193 and 196 of Indian Penal Code. But apparently it has been considered necessary to import it to income-tax law, because the offence of abetment can stand alone, even if there is no prosecution against an offender or such prosecution is compounded or it fails. Companies may become vulnerable, if they fail to keep proper accounts or make accommodation entries to suit others.

Procedural law: Companies will bear the brunt in respect of liability for tax deduction at source under Sec. 194C and many procedural requirements imposed on them by the quarterly report of tax deduction under Sec. 206C and annual report of information under Sec. 285BA with the threat of penalties prescribed for them. The disallowance under Sec. 40(a)(i) of amounts from which tax is failed to be deducted is extended to cover new areas under sections 194C, 194H and 194J. In view of the extension of service tax as well and the proposed shift to Value Added Tax (VAT), the companies would require strengthening of their tax wing to meet the new responsibilities.

S. Rajaratnam

© Copyright 2000 - 2009 The Hindu