INTERVIEW: MR. RAVI SAWANA ON UNION BUDGET 2024: A LEGAL LENS PERSPECTIVE

The RFMLR Editorial Board recently interviewed Mr. Ravi Sawana, Partner, Lakshmikumaran and Sridharan on the topic, "Union Budget 2024: A Legal Lens Perspective"

Mr. Ravi Sawana is a Partner in Direct Tax practice at Mumbai office of Lakshmikumaran & Sridharan.

Mr. Ravi is a litigator and appears before the High Court of Bombay and Income-tax Appellate Tribunals in India. In his 10+ years of professional experience, he has appeared for multinational corporations before Courts and Tribunals on domestic tax and international tax issues, transfer pricing, business restructuring, and trust laws. He regularly addresses professional forums on tax laws.

1. What pivotal experiences in your legal career have played a crucial role in shaping the course of your professional journey?

   Answer: I qualified as a Chartered Accountant in January 2012 and then worked in CA firms (Bansi S Mehta & Co and PWC). In my 6+ years of experience at these firms, I developed more interest in litigation and hence, in 2015, I decided to pursue LLB. During these stints, I briefed and assisted Sr. Advocates, and other counsels on complex income tax issues. The briefing experiences and handling of multiple litigation matters and inclination to appear before Courts and Appellate Authorities, incited me to pursue law. Post completion of LLB in 2018, I switched to L&S to pursue my legal career more rigoursly. Further, as a lawyer, the mindset to approach a litigation matter is different than a non-lawyer. We tend to think from legal perspectives and tend to find answers beyond the income-tax law and its commentaries e.g., GP Singh on Statutory Interpretation and Pollack and Mulla on TOPA etc. Thus, these experiences, amongst others, played a huge role in my overall development as a lawyer. 

   
   

2. The Union Budget 2024 has introduced several measures aimed at advancing a Digital India, including the digital credit system for MSMEs and e-commerce export hubs. However, given that similar initiatives, such as the SEBI dematerialisation scheme, were poorly executed in the past, do you believe that the current state infrastructure is adequately equipped to successfully facilitate these actions?

   Answer: The Government of India is taking necessary steps to create a “Digital Public Infrastructure” which is a technology enabling inclusion and availability of public and private services over digital network. This also includes access to credit and marketing. The prime example of one of such initiative is UPI and ONDC. Further, the MSME Ministry has built various models and tools to support the growth of MSME Industry in India such as Udayam Registration Portal, MSME Global Mart Portal etc. Thus, in my opinion, though there may be certain issues with the implementation and operation of the various digital initiatives taken by the GOI, but the overall intent and objective is to support the growth of MSME Sector in India. The fruits of which will certainly be seen in the longer run. 

   Further, looked at from tax perspective, I believe that the taxing statutes and tax department is also adequately equipped to deal tax implications arising from the digital transactions. The introduction of "Equalisation Levy' and "Withholding tax obligation on E-commerce Transactions" in the Income-tax Act, 1961 and levy of GST on "Online Information Data Base Access and Retrieval Services" under GST law was also well received and complied with by the industry. These steps were aimed at regulating the unregulated (from tax perspective) digital space. Indeed, the industry players including foreign companies adopted this taxation law changes. 

   
   

3. While the Income Tax Act provides a mechanism for filing appeals before various appellate authorities, the CBDT introduced the Direct Tax Vivad se Vishwas Act, 2020, to facilitate the expeditious disposal of appeals. Despite these efforts, litigation pendency has continued to rise, with more cases being filed than disposed of. How do you assess the effectiveness of the Vivad se Vishwas Scheme, 2024, introduced by the Finance Act, 2024, in comparison to earlier dispute resolution mechanisms?

   Answer: The DTVSV 2020 scheme led to settlement of 1,46,701 cases and tax disputes of Rs. 99,756/-. The exchequer realised Rs. 53,684/- Crore of tax revenue stuck in these litigation. It shows that the scheme was well received by the taxpayers. Though at certain fronts, the scheme was not dispute resolution friendly and hence, it did not receive the Answer expected by the government. 

   Buoyant from the success of DTVSV 2020 and to reduce the pendency of income-tax litigation in India, the DTVSV 2024 scheme has been introduced. It is largely based on the same format as that of 2020 with certain modifications and exceptions. The application under 2024 scheme can be filed on or after 01st October 2024 provided the respective income-tax appeal is pending as on 22nd July 2024. Further, those assesses who could not avail the benefit of 2020 scheme, are also eligible to settle their tax dispute. Further, the CBDT has also introduced FAQs vide Circular No. 12 of 2024 dated 15.10.2024 and Circular No. 19 of 2024 dated 16th December 2024, bringing clarity on certain aspects of dispute resolution under 2024 scheme.

   The scheme covered wide variety of tax disputes that can be settled. Further, the complete waiver of interest, penalty and prosecution related to the tax arrears being settled, present an ideal opportunity for the taxpayers to assess their pending tax cases and settle under 2024 scheme. 

   
   

   However, there are few factors which may affect the acceptability of the scheme by the taxpayers. First is heavier payment obligations on the old tax disputes (pending since DTVSV 2020 scheme) vis-a-vis those appeals which were filed after the DTVSV 2020. The taxpayers with old tax disputes would have to pay 10% higher than the other taxpayers. This differentiation without any intelligible differentia, is irrational. Second the search and seizure cases have been kept out of the purview of the scheme which no such exclusion was present in 2020 scheme. Third is the payment of higher tax amount where the tax disputes where addition has been made on account of unexplained cash credit, unexplained investment, unexplained expenditure etc. In last 3-4 years, most of the tax disputes are in respect of these additions. The higher payment obligation to settle such tax disputes are keeping the taxpayers away from option for the scheme.

   
   

   Further, exclusion of certain cases where appeal has not been filed but time limit to file appeal has not expired, are ineligible to settled their tax disputes (Sec. 89(1)(a) of the Finance (No. 2) Act, 2024). Such a narrow scope of the Scheme may affect the effectiveness of the scheme. On this controversy itself, recently the Delhi HC in Naveen Kumar Aggarwal v. CBDT (WP (C) 17014/2024) has directed the CBDT to consider such cases as eligible for DTVSV 2024. 

   
   

   The 2020 scheme was more favourable than the recently introduced 2024 scheme . 

   
   

4. The Budget 2024 introduces several measures aimed at attracting foreign investors and companies, such as reducing tax rates for MNCs from 40% to 35%, streamlining foreign direct investments, and removing the 2% equalisation tax on digital and e-commerce services provided by foreign companies. However, domestic companies have not been offered any additional benefits, aside from the removal of angel tax, which primarily benefits start-ups. What do you think this will mean for the competitiveness of domestic companies, and how might this imbalance be addressed?

   Answer: The Domestic Companies are paying tax at the rate of 22% (Sec. 115BAA). Further, those domestic companies who has commenced manufacturing between 01.10.2019 and 31.03.2024 has an option to pay taxes at rate of 15% (Sec. 115BAB). Thus, if we look at the comparison of tax rates applicable to domestic companies which is 15% / 22% vis-a-vis foreign companies which is 35%, then it shows that the domestic companies are paying lower taxes presently. Thus, I do not see any imbalance in the same. 

   Further, the main reason for slashing tax rate for foreign companies from 40% to 35% is to attract the foreign investment for domestic needs (as stated by the Hon'ble FM in the Budget Speech of 2024). This would not impact the competitiveness of the domestic companies. In fact, reduced tax rate for foreign companies might led to more foreign investment in the domestic companies via FDI which may boost the capability and enhance the performance of the domestic companies.  

5. The recent amendment, effective from October 1, 2024, shifts the taxation of income from buybacks of shares by companies to be chargeable as dividends in the hands of the recipient investor, rather than the previous regime of additional income tax on the company. While this was taxed at 20% earlier, taxpayers in higher tax brackets now face higher tax liabilities. In your opinion, what legal challenges could arise from the application of the deemed dividend provision, particularly in cases where companies may not have 'accumulated profits'?

   Answer: Section 2(22) of the Income-tax Act, 1961 defines 'Dividend'. Prior to introduction of Section 115QA in 2003, the profits on buy-back of shares were taxable as capital gains in the hands of the shareholder. With the introduction of Sec. 115QA in 2003, buy-back was made taxable in the hands of the respective Companies. However, vide the Finance (No. 2) Act, 2024 w.e.f. 01.10.2024, taxability of buy-back has been shifted from Companies to the Shareholders. For this, clause (f) has been added in Section 2(22) of the Act. 

   The buy-back clause in the definition of dividend is worded differently than other clauses. The other clauses (clause (a) to (e)) of Section 2(22) provides that the amount distributed or paid shall be taxable as dividend to the extent of "accumulated profits". However, with respect to buy-back of shares (Clause (f) to Section 2(22)), there is not such condition that the buy-back of shares to the extent of accumulated profits shall alone be taxable as dividend. 

   As regards, question that if accumulated profits are not available and buy-back is made, then whether such buy-back would be treated as deemed dividend. In my view, the taxability of amount received on buy-back of shares as dividend is not dependent on availability of accumulated profits with the companies. Clause (f) in Sec. 2(22) is worded differently than the other clauses in Sec. 2(22). Also, the taxability in the hands of shareholders of buy-back of shares as dividend is irrespective of the funds out of which it is paid. The SC in Bacha F. Guzdar (27 ITR 1) had held that the agricultural profits distributed to shareholders would be taxable as dividend in the hands of shareholders irrespective of the fact that the such profits are not taxable in the hands of the company. Further, as Kanga & Palkhiawla in Law & Practise of Income-tax (10th Edition at Page 364) notes that neither the shareholder cannot be beneficially entitled to the fund out of which the dividend is paid or distributed nor the capital character of funds be taken into consideration.

   From the non-resident shareholders perspective, whether income on buy-back of shares would be taxable as deemed dividend under section 2(22)(f) or Capital Gains under the DTAA? The definition of dividend under the DTAA is autonomous. The said definition is not influenced by the amendments made in the definition of dividend under the domestic law. The phrase income from shares in the definition of dividend under the DTAA would not include income from transfer of shares. Income from shares is dividend income and income from transfer of shares is capital gains. Income arising from buy-back of shares is also income from alienation of shares and hence, income arising from transfer of shares. Klaus Vogel - 4th (Para 145, Page 1078) and 5th Edition (Para 152, Page 1247) explicitly supports this. Therefore, one of the legal challenge of this amendment in the hands of non-resident would be characterisation of income as dividend or capital gain.

6. The government recently backtracked on its initial stance by allowing taxpayers the option to choose the indexation benefit regime for immovable properties acquired prior to 23rd July 2024. How do you view this policy shift? Do you think this flexibility could provide a more balanced approach to taxation, or does it introduce uncertainty in tax planning for investors?

   Answer: Yes. It gives the respective taxpayers much more flexibility to chose the tax rate which is most favourable to them. It does not led to any uncertainty. At the end of the day, the taxpayer shall be required to make a calculation of effective tax rate under both the option and choose which is most favourable to them. This change in policy shift was based on representations made by the taxpayers in anomaly / tax burden that would have arisen if this option was not given. 

7. The recent hike in tax rates on Compulsory Convertible Debentures (CCDs) from 10% to 35% has been a subject of significant debate. Given that CCDs primarily offer equity in the issuing company rather than immediate cash returns or material profits, and considering their unsecured nature, it appears that the potential for profits is limited. In light of this, do you think this tax increase will discourage investors, even if the move is based on good faith? What are your thoughts on the implications for investor sentiment and market behavior?

   Answer: Prior to the recent finance budget, gains on unlisted CCDs held by foreign investors which are held for less than 3 years were taxable at maximum marginal rate. However, those CCDs which are held for more than 3 years, were taxable in the hands of such foreign investors at 10%. Post FA (No. 2) 2024, such instrument held for more than 3 years shall also be treated as “short term capital asset” and thereby attracting a tax rate of 35%. 

   CCDs are largely issued to the foreign shareholders under FDI. This shift in tax base may impact the investment by foreign investors. This is coupled with increase in tax rate of LTCG from 10% to 12.50% and STCG from 15% to 20%. 

8. What is your advice to young professionals and law students who aim to build a career in the area of Direct Tax?

   Answer: The direct tax law is based on basic jurisprudential principles. Further, the understanding of direct tax law would be incomplete if one doesn’t have knowledge of basic principles of Contract Law, Transfer of property Act, Evidence Act, Limitation Act, Trust Law and General Clauses Act. My advise would be to strengthen the basic principles of these laws and thereafter, aim to build a career in direct tax law. Further, a regular reading of celebrated commentaries like Kanga & Palkhiwala and Samapath Iyengar would strengthen their knowledge and understanding of the direct tax law.