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  • Tax Matters: Why are so many buyback offers coming of late?

    Deemed exports are not zero-rated supplies. They will be subject to levy of taxes. However, refund of tax paid is admissible to either the supplier or the recipient

    A lot of buyback offers are coming of late. What is the reason for such a spurt?

    — Kunal, e-mail

    Of late, the number of companies including government-owned PSUs seems to prefer buyback of shares instead of paying out dividends to reward the investors. One of the major reasons for the spurt is the Union Budget 2016. It made dividend receipts above Rs 10 lakh taxable at 10% in the hands of investors. When a company declares a dividend, it has to pay dividend distribution tax on the payout. Besides, the dividend is paid out from the net profit. Net profit is arrived at after paying corporate taxes. An additional tax on dividends (above Rs 10 lakh), therefore, made dividend payment unattractive.

    When a buyback is concluded through the tender offer route on a proportionate basis, profit is treated as long-term capital gains. The method, therefore, is economical than taxes on dividend payouts.

    Further, dividend is distributed by companies from net profit in the form of cash payouts. To that extent, it reduces the market value of the company. However, as buyback is a reduction of the outstanding capital, it improves the earnings per share of the company and, thus, valuation. If a stock is undervalued, the company can buy back its shares at a reduced price and reissue them once the market has corrected, thereby increasing its equity capital without issuing any additional shares.

    Buybacks also act as price stabiliser. When a company indicates it is willing to buy back the stock at a certain price, it signals to the market of a fair price for the stock. Besides, buybacks also help promoters consolidate their stake in the company.

     

    Zero-rated supply is difficult to understand. Please explain.

      — Ved Prakash, e-mail

    All supplies need not be zero-rated. Zero rating is meant that the entire value chain of the supply is exempt from tax. Output is exempt from tax. There is no bar on taking / availing credit of taxes paid on inputs.

    Zero-rated supply includes export of goods, services or both and supply of goods, services or both to a special economic zone (SEZ) developer or a SEZ unit. Refund can be availed of input tax credit (ITC) paid on goods and services used for making zero-rated supplies. The registered person supply can claim refund under bond or letter of undertaking without payment of integrated good and services tax (IGST) and claim refund of unutilized input tax credit. Else, he can supply goods on payment of IGST and claim refund of IGST paid on goods and services.

    The letter of undertaking (LUT) is valid for the entire financial year. However, if payment is not received within the prescribed period, facility of LUT is deemed to have been withdrawn. If payment is received later, the facility to export under LUT is restored.

    No refund of unutilized ITC is allowed if the goods exported out of India are subjected to export duty and when the goods or services avail duty drawback of Central GST (CGST), state GST (SGST) or Union Territory GST (UTGST) and refund of IGST paid on such supplies is claimed.

    As much as 90% provisional refund under Section.54 (6) of the CGST Act, 2017, is granted subject to the person claiming refund has in any five years immediately preceding the tax period to which the claim for refund relates has not been prosecuted for any offence under the GST law or under an earlier law when the amount of tax evaded exceeds Rs 2.50 crore.

    For refund of IGST paid on exports, the shipping bill filed by an exporter is deemed to be an application for refund. No separate application is needed. However, export general manifesto has to be filed. The applicant has to furnish a valid return in Form GSTR-1 & 3B. The taxable person can claim ITC on export supplies including on deemed supplies to SEZ. The taxable person has to apply in RFD-01 (earlier RFD 01A) along with other prescribed documents.

    Deemed exports are not zero-rated supplies. They will be subject to levy of taxes. Such supplies cannot be made under bond or LUT. However, refund of tax paid on deemed exports is admissible to either the supplier or the recipient on application for refund.

    Notified deemed exports comprise supply of goods by a registered person against advance authorisation and export promotion capital goods authorisation to export-oriented unit, software technology park, electronic hardware technology park or bio-tech park by a bank or PSU specified in the customs notification dated 30 June 2017 (as amended) against advance authorisation.

     

    I am an owner of an apartment on the second floor in a building at Wadala, Mumbai. It was constructed by my forefathers around 1999. The apartment on the first floor was acquired by me for Rs 60 lakh. The first name was of my eldest son. My wife's name was also in the deed. No specific percentage was mentioned. Next year, an apartment on the ground floor was acquired from my friend for Rs 60 lakh in the name of my second son, wife and me. All these years I have shown only in my return the second floor apartment. As I am a managing director, that is, a salaried person, my balance sheet has not been filed so far. Can you explain the concept of deemed let-out? I have been advised to show Rs 60 lakh plus Rs 60 lakh as gift to my two major sons as their families are staying in those apartments since the date of the acquisition.

    — Prakit Bapat, e-mail

    When a tax payer constructs a building on land not belonging to him, income from such building is charged to tax under the head, ‘Income from House Property'. It is not necessary that the ownership should extend to the land on which the property was built.

    When a tax payer owns two or more house properties meant for self-occupation, he can opt to treat one such house property as self-occupied. The remaining houses are deemed as let-out properties. He has to pay tax on all other house properties even if they have been lying vacant or occupied by any family member. As a result, the market rent a similar property would fetch if let out for the complete year is deemed as the annual value of such property. The individual has to pay tax on it even if he does not earn any income from such property. Municipal taxes actually paid can be claimed as deduction.

    Both the deductions are permissible under Section 24 of the Income Tax (IT) Act, 1961, and can be claimed as available for let-out property. The ceiling prescribed for one self-occupied property for interest on loan borrowed does not apply to a deemed let-out property.

    The option can be changed year after year in a manner beneficial to the tax payer. Generally, the house with the higher gross annual value is treated as self-occupied so that the house with lesser gross annual value is liable to tax as deemed let-out property. However, one more aspect that has to be considered before exercising the option is the amount of interest on loan borrowed for each property. While interest can be claimed without any limit as deduction for deemed let-out property, deduction of interest gets restricted for self-occupied or unoccupied property, subject to a maximum amount of Rs 30000 or Rs 2 lakh.

    An individual may have to maintain two houses at two different locations due to his employment, children's education or to provide residence to parents. Owning one house is a necessity but owning two houses might be a compulsion. If a person has to maintain two houses, one for his immediate family and another for his parents, he has to pay tax on the notional rent of the second house property.

    Thus, this concept of deemed rent to levy tax on the notional income of second house property is viewed as detrimental and unfavourable to individual tax payers. To give relief to individual tax payers, the IT Act was amended in the Interim Budget, 2019, allowing tax payers to claim any two house properties as self-occupied. In other words, from the financial year 2019-20, a tax payer will not be required to pay tax on the notional rent of the second house property, if conditions specified in Section 23(2) of the IT Act are satisfied.

    The issue in your case, whether a house property is deemed to be occupied for own residence if family members of the owner occupy it has been evaluated by various courts and tribunal. In most cases, it has been held by the judiciary that the property must be retained by the owner for his personal occupation for deeming it to be a self-occupied. An owner of a property can permit his family members to reside, but it must be retained by him for his personal occupation also. Therefore, a property is not treated as self-occupied if the owner doesn't retain it for personal occupation.

    As you have not yet submitted your balance sheet, you have been told to show Rs 60 lakh plus Rs 60 lakh as gift to your children in the year of purchase of property and, accordingly, rectify the subsequent balance sheets. You are advised to show cash gifts because gifting properties may involve stamp duty and other issues. However, the arrangement is tantamount to tax evasion and is not ethical.

     

    Can you throw some light on Hindu undivided family (HUF) and daughters?

    By Rajeshree dated 19/12/2019

    HUF consists of lineal male descendants from a common ancestor plus their wives and unmarried daughters.A son is not a must for an HUF, as held by Supreme Court. A male, his wife and daughter also create HUF. HUF is created when a male marries: husband and wife create an HUF. HUF is taxed separately from its members.

    The Hindu Succession (Amendment) Act, 2005, removed gender discrimination. Daughters by birth become co-parceners in their own right as sons and have same rights in HUF as sons and are subject to the same liabilities of HUF property. They can ask for partition of property and demand a share equal to that of a son. However, only daughters who are born in the family will get the co-parcenery rights. Other female members, who come into the family by marriage are still treated as members only.

    The head of the HUF is called the karta. A woman cannot be a karta. But, in December 2015, the Delhi High Court ruled in favour of a female being a karta. Thus, after the demise of the father in an HUF, if the eldest is a daughter, then she becomes karta of that same HUF with the mother and siblings, if any, as members of the HUF.

    Prior to the 2005 amendment, a daughter would cease to be a member of the parental HUF after marriage. Post amendment, she retains her right to co-parcenery and also the right to be karta if she is the eldest. A woman may even be a karta in the family she marries provided she is a widow and the only major in the family. Even when a married daughter has died, her children will be entitled to receive her share on partition. If none of her children are alive, her grand children will be entitled to the shares that the daughter would have received on partition.

    There limitations of women in HUFs. They cannot set up an HUF in their name. They cannot be coparcener in their husband's HUF. They can only be members. As member, women cannot demand partition of their husband's HUF. But when the property is partitioned, they get an equal share as that of a co-parcener.

    The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same. Readers may e-mail their queries on direct taxation to: tax-matters@capitalmarket.com

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