(MENAFN- Khaleej Times) Q: My son, having qualified from an American university, is planning to set up a business entity in India. Several relatives and friends have agreed to put in their capital and I will also do so as I will be joining his business in due course. I have been told that some investigation may be undertaken by the tax department in India to determine the genuineness of the source of funds which are invested in this business. Is this so, as it may put off some prospective investors? A: There is a provision in the law that the tax department may investigate the source of investments if the value of the shares, including the premium, exceeds the fair market value of the shares. In such an event, the excess amount may be treated as the income of the business entity. However, specified startups have now been made exempt from this law, provided they obtain a certificate from the Department for Promotion of Industry and Internal Trade. This department will look into the genuineness of the business and issue a certificate if the start-up complies with certain conditions for exemption from applicability of the tax law.
A startup will be exempt if the total investment is within the limit of 250 million rupees and its turnover in any financial year has not exceeded one billion rupees. This benefit will be available during the initial period of 10 years from the date of incorporation of the company or the registration of the partnership firm. At present, about 300 entities had applied for the certificate and 277 have been granted which would make them eligible for exemption from the tax provision. Therefore, your son should be advised to apply to the DPIIT, and once this certificate is granted it should be furnished to the tax authorities so that no investigation is made regarding the funds invested in his business.
Q: I am a doctor by profession and was practicing in India for ten years before coming to the Gulf. I had a nursing home in India on which I claimed depreciation when I was paying tax in India. When I came to the Gulf, I sold this property and invested the capital gains in buying a residential house in India. The Assessing Officer has denied the exemption on the ground that the capital gain was made on sale of a depreciated asset and the capital gains are to be treated as short-term. Is he justified in doing so?
A: Under section 50 of the Income-tax Act, when an asset is sold in respect of which depreciation has been charged, the capital gains arising on such asset are deemed to be short term capital gains. Therefore, tax would be chargeable at the normal rate and not at the concessional rate of 20 per cent applicable to long term capital gains. However, Courts have taken the view that this deeming provision of section 50 cannot be extended to other provisions of the law.
Therefore, where exemption is applicable under section 54-F of the Income-tax Act in respect of capital gains made on sale of an asset which has been held for more than three years, such capital gains would be treated as long term. The benefit of section 54-F would, therefore, be applicable if the other conditions of this provision are satisfied. Hence, if you have purchased the residential house within two years from the date of selling your nursing home, you will be eligible for exemption from capital gains tax under section 54-F. You should appeal against the assessment order as this exemption is denied.
Q: I am joining my family business on return to India which involves transportation. I am told that there is now a new provision applicable under the Goods and Services Tax law which requires truck operators to generate e-way bills. I need some guidance on this.
A: Under the Goods & Services Tax law, an electronic-way bill system has been introduced. Under this arrangement, only one e-way bill has to be generated for each invoice. No additional e-way bills can be generated by the consignor, consignee or transporter. An e-way bill is required for movement of goods worth more than 50,000 rupees across state borders. Trucks caught without an e-way bill for each invoice may be liable to a penalty of 10,000 rupees.
The cargo can be inspected to find out whether there is any tax evasion. Penalty to the tune of hundred percent of the tax evaded can be levied in addition to the tax. Both the vehicle and the goods can also be impounded. Under the e-way bill system, the distance for movement of goods will be based on the postal PIN codes of the source and destination locations. A variation up to 10 per cent is permitted. All this has been done to minimise scope for tax evasion.
The writer is a practicing lawyer, specialising in tax and exchange management laws of India.
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