S3-newsletter dated January 28, 2020

SECTION 269SU OF THE INCOME-TAX ACT, 1961, READ WITH RULE 119AA OF THE INCOME-TAX RULES, 1962 – ACCEPTANCE OF PAYMENT THROUGH PRESCRIBED ELECTRONIC MODES – CLARIFICATION IN RESPECT OF PRESCRIBED ELECTRONIC MODES UNDER SAID SECTION

CIRCULAR NO.32/2019 [F.NO.370142/35/2019-TPL], DATED 30-12-2019

In furtherance to the declared policy objective of the Government to encourage digital economy and move towards a less-cash economy, a new provision namely Section 269SU was inserted in the Income-tax Act, 1961 (“the Act“), vide the Finance (No. 2) Act 2019 (“the Finance Act,”), which provides that every person having a business turnover of more than Rs 50 Crore (“specified person”) shall mandatorily provide facilities for accepting payments through prescribed electronic modes. The said electronic modes have been prescribed vide notification no. 105/2019 dated 30.12.2019 (“prescribed electronic modes”). Therefore, with effect from 01st January, 2020, the specified person must provide the facilities for accepting payment through the prescribed electronic modes. Further, Section 10A of the Payment and Settlement Systems Act, 2007, inserted by the Finance Act, provides that no Bank or system provider shall impose any charge on a payer making payment, or a beneficiary receiving payment, through electronic modes prescribed under Section 269SU  of the Act. Consequently, any charge including the MDR (Merchant Discount Rate) shall not be applicable on or after 01st January, 2020 on payment made through prescribed electronic modes.

In this connection, it may be noted that the Finance Act has also inserted section 27IDB in the Act, which provides for levy of penalty of five thousand rupees per day in case of failure by the specified person to comply with the provisions of section 269SU. In order to allow sufficient time to the specified person to install and operationalise the facility for accepting payment through the prescribed electronic modes, it is hereby clarified that the penalty under section 271DB of the Act shall not be levied if the specified person installs and operationalises the facilities on or before 31st January, 2020. However, if the specified person fails to do so, he shall be liable to pay a penalty of five thousand rupees per day from 01st February, 2020 under section 271DB of the Act for such failure.

A new Rule 119AA has also been inserted, which reads as under:

119AA. Modes of payment for the purpose of section 269SU.– Every person, carrying on business, if his total sales, turnover or gross receipts, as the case may be, in business exceeds fifty crore rupees during the immediately preceding previous year shall provide facility for accepting payment through following electronic modes, in addition to the facility for other electronic modes of payment, if any, being provided by such person, namely:-

  • Debit Card powered by RuPay;

(ii) Unified Payments Interface (UPI) (BHIM-UPI); and

(iii) Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code).”.

Our views :

At this stage it is not clear as to whether companies which have sales turnovers arising out of B2B transactions, including billing to their own parent companies, are covered by this development. It is also not clear as to whether foreign companies operating in India are covered. It is to be further noted that the Section only requires the seller to implement the following three methods and does not compel the buyer to follow any of these methods to effect payments to the seller.

Though, per se, it would seem that the intent of this new development is to compel retail businesses, shops, etc. to switch to the prescribed modes of payment, the manner in which this Section has been drafted leaves much to be desired.

Some IT companies have already started receiving notices from the Income tax Department on whether they have implemented this Section.

  1. LOWER INCOME TAX RATES FOR DOMESTIC COMPANIES FROM FY2019-10 ONWARDS
  • Eligibility : Section 115BAA has been inserted in the Income Tax Act,1961 to give the benefit of a reduced corporate tax rate for domestic companies. Section 115BAA states that domestic companies have the option to pay tax at a rate of 22% (plus applicable surcharge and cess) from the FY 2019-20 (AY 2020-21) onwards, if such domestic companies adhere to certain conditions specified.
  • Conditions required to be fulfilled :
  • Such companies should not avail any exemptions/incentives under different provisions of income tax. Therefore, the total income of such company shall be computed without:

Claiming any deduction especially available for units established in special economic zones under section 10AA

Claiming additional depreciation under section 32 and investment allowance under section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal

Claiming deduction under section 33AB for tea, coffee and rubber manufacturing companies

Claiming deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India

Claiming a deduction for expenditure made for scientific research under section 35

Claiming a deduction for the capital expenditure incurred by any specified business under section 35AD

Claiming a deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD

Claiming deduction under chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA

Claiming a set-off of any loss carried forward from earlier years, if such losses were incurred in respect of the aforementioned deductions

  • Such companies will have to exercise this option to be taxed under the section 115BAA on or before the due date of filing income tax returns i.e usually 30th September of the assessment year. Once the company opts for section 115BAA in a particular financial year, it cannot be withdrawn subsequently.
  • The new effective tax rate, which will apply to domestic companies availing the benefit of section 115BAA is 25.168%. The break up such tax rate is as follows:
Base tax rateSurcharge applicable CessEffective tax rate
22%10%4%22*1.1*1.04 = 25.168%

Such companies will not be required to pay minimum alternate tax (MAT) under section 115JB of the act.

The domestic companies opting for section 115BAA will not be able to claim MAT credits for taxes paid under MAT during the tax holiday period. The companies would not be able to reduce their tax liabilities under section 115BAA by claiming MAT credits. The CBDT may issue a clarification on MAT credits in case of companies opting for tax under section 115BAA.

Moreover, the domestic company opting for section 115BAA shall not be allowed to claim set-off of any brought forward depreciation (additional depreciation) for the assessment year in which the option has been exercised and future assessment years.

There is no timeline for the domestic companies to choose a lower tax rate under section 115BAA. Therefore, such companies can avail the benefit of section 115BAA after claiming the brought forward loss on account of additional depreciation and also utilising the MAT credit against the regular tax payable if any.

The domestic companies who do not wish to avail this concessional rate immediately can opt for the same after the expiry of their tax holiday period or exemptions/incentives as mentioned earlier.

However, once such a company opts for the concessional tax rate under section 115BAA of the Income Tax Act,1961, it cannot be subsequently withdrawn.

  • The domestic companies who do not wish to avail this concessional rate immediately can opt for the same after the expiry of their tax holiday period or exemptions/incentives as mentioned  earlier.

However, once such a company opts for the concessional tax rate under section 115BAA of the Income Tax Act,1961, it cannot be subsequently withdrawn.