What GST Means For The Common Man & Its Effect Thereon?

France was the first one to introduce Goods and Service Tax. In India, the introduction of Goods and Service Tax (GST) has been marked as the most revolutionary tax reform. India has made Goods and Service Tax (GST) effective from 1^st July 2017.  With the introduction of GST, several central taxes and state taxes have been merged into GST, which mainly eliminated the cascading effect of taxes.

After more than two years of introduction of GST, the common man is still trying to figure out the means of GST and its impact thereon. It is important to analyze and understand what is meant by GST for the common man and how GST affects the common man’s life. The present article tries to come up with the analysis of the means and impact of GST on the common man. 

What GST means for the Common Man?

From common man’s perspective, GST simply means payment of single indirect taxes instead of several erstwhile central taxes and state taxes like Excise duty; Service tax; VAT / Sales tax; Central Sales Tax; Purchase Tax; Luxury tax etc.

GST is levied on the supply of goods and services. GST is a dual levy that would be simultaneously levied by both Centre and State. In the case of supply within state/union territory (i.e. intra-state supply), GST will have two components i.e. Central Tax (CGST) and State Tax/ Union Territory Tax (SGST / UTGST).

Further, in case of a supply in different states (i.e. inter-state supply), GST will have only one component known as Integrated Tax (IGST). IGST would be levied at the rates equal to the sum total of CGST and SGST / UTGST

It is important to understand that the GST tax slabs are divided into four different rates like 5%, 12%, 18%, and 28%. The rates of GST are revised several items after the introduction of GST. However, it should be noted that the food products and other essential items are either taxed at 0% or at 5%, whereas, the luxury items are taxed at higher GST rates.

It can be concluded that due to the lower GST rates on the essential items, and the abolition of other indirect taxes and removal of the cascading effect of taxes, GST has marked a favorable effect on the common man’s budget.

How GST would affect the Common Man’s life?

Positive effect/impact of GST and negative effect/impact of GST on the common man’s life is explained in the below paras.

Figuring out some positive impact of GST on the common man –

Introduction of GST, subsuming various central and state taxes has resulted in the simplification of the tax structure. Such a simple tax structure of GST helps the common man to understand and implement the same easily and effectively. The simple structure also increases transparency in the system which in turn helps the consumer to clearly know the quantum and base of taxes.

Further, the basic aim for the introduction of GST is the removal of the cascading effect of tax on tax. GST is formed with a motto ‘One Nation One Tax’. Such removal of the cascading effect has lowered the average cost burden of the common man.

Due to the removal of the cascading effect and availability of input tax credit (ITC) of GST paid, there is less burden of taxes on the manufacturing and service sector resulting in less cost in both manufacturing and service price.

Figuring out some negative impact of GST on the common man –

GST has brought along with its huge list of compliance in the form of return filing. Such a huge compliance requirement has made it difficult for the common man to deal with the same. Further, the huge compliance requirement has also resulted in huge compliance costs making it even more difficult for the common man.

Since the implementation of GST, various amendments are being introduced be it in the form of rates or returns etc., which has made the law quite complicated. It is almost impossible for the common man to keep oneself updated with the frequent amendments.

Entire compliance under GST has been digitized, which has a positive effect in terms of reduced corruption. However, due to complete digitization, common man requires experts to deal with their day to day GST compliance.

Conclusion –

Even though the common man has positively adopted the implementation of GST, the frequent amendments; huge compliance and requirement of expert technical know-how has spoiled the game to some extent.

Capital Gain Tax on Shares

Section 14 of the Income Tax Act, 1961 defines five ‘Heads of Income’ which are –

●       Income from Salaries;

●       Income from house property;

●       Profits and gains of business or profession;

●       Income from Capital gains; and

●       Income from other sources.

In the present article, we would try to understand the capital gain taxation on the sale of shares.

Understanding the term ‘Short term capital assets’ and ‘Long term capital assets’ –

Before understanding the taxation of capital gain on sale of shares, it is important to understand the terms ‘capital asset’, ‘short term capital assets’ and ‘long term capital assets’ which are explained hereunder –

Provisions of section 45 of the Income Tax Act, 1961 states that any profit or gain arising from the transfer of a capital asset is a capital gain. ‘Capital asset’ is defined under section 2 (14) of the Income Tax Act, 1961 which means –

• Property of any kind held by the assessee (whether or not connected with the business or profession;
• Any securities held by the Foreign Institutional Investor which is invested in such securities as per SEBI regulations.

However, capital assets do not include the following –

• 6% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980.
• Gold Deposit Bonds (issued under the Gold Deposit Scheme, 1999), or Deposit Certificate (issued under the Gold Monetisation Scheme, 2015).
• Special Bearer Bonds, 1991.
•   Agricultural land in the rural India.

Any stock-in-trade, raw materials or consumable stores held for the purposes of the business or profession.

Personal goods like clothes, furniture etc. held for personal use but doesn’t include jewellery, drawings, paintings, archaeological collections, sculptures or any work of art.

Based on the period of holding, the capital assets are divided into two parts, namely, short term capital assets and long term capital assets. The meaning of the term ‘short term capital assets’ and ‘long term capital assets’ are explained hereunder –

Short term capital assets mean the capital asset held by the assessee for the period of not more than 36 months immediately preceding the date of its transfer. However, for the following listed assets, the same would be considered as short term capital assets if the holding period is less than 12 months –

1. Security listed in a recognized stock exchange in India.
2. Unit of Unit Trust of India.
3. Unit of equity oriented fund.
4. Zero coupon bond.
5. Equity / preference shares in the company listed in a recognized stock exchange in India.

 Even though not connected with shares, it is important to mention here that with effect from 1^st April 2018 the holding period of 36 months has been reduced to 24 months in case of an immovable property being land or building or both.

Long term capital assets simply means the capital assets, which is not short term capital assets.

Capital Gain Tax on sale of Shares –

It should be noted that until 1^st April 2018, the long-term capital gain on transfer of equity shares, units of equity oriented funds and units of business trust were exempted under section 10 (38) of the Income Tax Act, 1961, if the following conditions are satisfied –

• The transaction of transfer of equity shares / units of equity oriented mutual funds / units of business trust is liable to Securities Transaction Tax i.e. STT;

• The equity shares / units of equity oriented mutual funds / units of business trust are long term capital assets; and
• The transfer of equity shares / units of equity oriented mutual funds / units of business trust has taken place on or after 1^st October 2004.

However, from 1^st April 2018, new section 112A was inserted in the Income Tax Act, 1961 which dealt with the taxability of the same. As per section 112A, long term capital gain on transfer of equity shares / units of equity oriented mutual funds / units of business trust shall be taxable @ 10% (without indexation). However, the tax on long term capital gain on transfer of equity shares / units of equity oriented mutual funds / units of business trust shall be levied only in excess of INR 1 Lakhs.

Explaining the Income Tax Rates on transfer of shares –

The following table explains the short term capital gain tax rates and long term capital gain tax rates on the sale of shares –

Particulars	Short term capital gain	Long term capital gain
Sale of shares of listed on the recognized stock exchange and mutual funds on which Securities Transaction Tax (STT) is paid	15%	10% (on gains exceeding INR 1 Lakhs)
Sale of bonds / debentures / shares and other listed securities on which securities transaction tax is not paid	At the applicable income tax slab	10%
Debt funds	At the applicable income tax slab	20% with indexation [minimum holding period 3 years]

What is Corporate Debt Restructuring?

The term "CDR" (Corporate debt restructuring) can be defined as the reorganization of the outstanding obligations of a distressed company to restore its survival and liquidity. Generally, corporate debt restructuring is achieved by way of negotiation between the distressed company and its creditors (banks, financial institutions etc.), by reducing the outstanding debt of the company, and also by minimizing the rate of interest it pays while increasing the payback period to pay the obligation back. Sometimes, a company's outstanding debt may be waived by its creditors in exchange for equity shares in the company.

Based on the past experience in other countries like the Thailand, U.K., Korea etc. of putting in place institutional mechanism for corporate debt restructuring and need for such mechanism in the country, a system of Corporate Debt Restructuring was evolved in India, and the detailed guidelines of the same were issued.

Objectives of the Corporate Debt Restructuring Framework

The prime objective of the Corporate Debt Restructuring framework is to ensure transparent mechanism and timely restructuring of the corporate debts of viable corporates facing financial crisis. Particularly, the Corporate Debt Restructuring framework will endeavour at preserving viable corporates that are affected by certain factors (whether internal or external) and curtail the losses to the creditors and other stakeholders of the corporate through a coordinated and an orderly restructuring programme.

Structure:

Corporate Debt Restructuring  system will have a three-tier structure:

•      CDR Standing Forum and its Core Group
•      CDR Empowered Group
•      CDR Cell

Eligibility Criteria

      The scheme of corporate debt restructuring will not be applicable where the accounts involve only one bank or one financial institution. The corporate debt restructuring mechanism will cover only multiple banking accounts/consortium accounts/ syndication with an outstanding exposure of Rs.20 crore and above by banks and financial institutions.

·     The Category 1 corporate debt restructuring system will be applied only to accounts that are classified as ‘standard’ and ‘sub-standard’. There may be a situation where a small part of debt by a bank might be classified as doubtful. In such a situation, if the account has been classified as ‘standard’ or

     ‘substandard’ in the books of 90% of lenders (by value) at least, the account would be considered as standard or substandard, for the purpose of judging the account as eligible for CDR only, in the books of the remaining 10% of lenders.

·      There would be no need of the company/account being sick, being in default for a specified period, NPA before the reference to the debt restructuring system. However, cases of NPA which are potentially viable will get priority. This approach would provide the flexibility and also facilitate timely intervention for debt restructuring.

·       In no case, the corporate debt restructuring request of any corporate indulging in misfeasance, wilful default or fraud, even in a single bank, will be considered for debt restructuring under corporate debt restructuring system.

·      The accounts where the lenders have filed recovery suits against the corporate entity may be eligible for restructuring under the corporate debt restructuring system provided, at least 75% of the lenders (by value) has taken initiative to resolve the case under the CDR system. However, such restructuring under the CDR system would require that the account meets the basic criteria to become eligible under the corporate debt restructuring mechanism.

·         

     Only large BIFR cases would be eligible for restructuring under the corporate debt restructuring system if specifically recommended by the CDR Core Group. This means that small and medium BIFR cases would be eligible for restructuring under the CDR system. The Core Group shall reoffer only exceptional BIFR cases for consideration under the CDR system.

Conclusion:

CDR (Corporate Debt Restructuring) mechanism is a non-statutory and a voluntary mechanism under which banks and financial institutions come together for restructuring the debt of companies experiencing financial crisis due to certain internal or external factors. This restructuring is done to provide timely financial support to such companies. This is an essential step taken by the government for the healthy functioning of the Indian market and soars the economic growth by efficiently dealing with defaulters.

Private Placement of Shares

Private Placement of Shares

Narrating in simple terms, a private placement is one of the ways through which the company can raise its share capital. Through private placement, the company can raise the capital by offering its shares to a selected group of persons. Following are the relevant section and rule as applicable to the private placement of shares –

·         Section 42 of the Companies Act, 2013; and

·         Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

It must be noted that both the above-referred section and rule has undergone various amendments and the said amendments have been made effective from 7^th August, 2018. Present article helps to analyze the various provisions and procedure involved in the private placement of shares.  

Pre-Requirements of Making Private Placement –

Under private placement before making any offer or invitation to the subscriber, it is mandatory for the company to obtain previous approval of an offer from its shareholders, by way of passing the special resolution. Such previous approval is mandatory for each of the offer or invitations.

Following disclosures needs to be done in the explanatory statement that is being annexed to the notice for the shareholders –

·         Particulars of offers;

·         Date of the passing of board’s resolution;

·         Type of securities offered along with its price and justification / basis of the price offered;

·         Name and address of the valuer;

·         Total amount which the company can raise by way of such securities;

·         Material terms of raising such securities etc.

It must be noted that before making any private placement offer / invitation, the company is required to file, special resolution or board’s resolution, in the Registry.

Restriction on Total Number of Offer or Invitation –

A private placement shall be made only to an ‘identified person’, who has been identified by the Board and such numbers shall not be more than 50 or such higher numbers as may be prescribed.

Further, it must be noted that, the private placement offer or invitation, to subscribe securities, cannot be made to persons more than 200 in aggregate in a financial year. It must be noted that the restriction of 200 persons is to be calculated individually for each kind of securities i.e. equity, preference shares or debentures.

Following are the list of persons which are to be excluded while calculating the limit of 50 or 200 persons –

·         Offers or invitation made to qualified institutional buyers; or

·         Offers or invitation made to employees of the company under a scheme of employees stock option.

Offer of Private Placement –

The company is required to make private placement offer in the form of an application in FORM PAS 4. Such application needs to be serially numbered and it should be specifically addressed to the person to whom the offer is being made.

Such an application can be sent to the identified person, within a period of 30 days of recording of the name, either in writing or in electronic mode.

Acceptance of Private Placement Offer –

The identified person who is willing to subscribe to the offer of private placement shall apply along with the subscription money. Subscription money is payable either by cheque or demand draft or any other banking channel, however, cash payment is not allowed.

Allotment of Securities –

A company is required to allot its securities within a period of 60 days from the date of receipt of the application money. However, in case the company is not able to allot its securities, the company is required to repay the allotment money to the subscribers within 15 days (no interest is payable if the amount is repaid within 15 days). After the completion of the period of 15 days (in total 75 days i.e. 60 + 15), the company is liable to pay interest @ 12% per annum and such interest is payable from the 61^st day.

Maintanence of Record –

The company is required to maintain all the records in FORM PAS 5.

Return Filing –

·         Return is to be filed in FORM PAS 3;

·         Return is to be filed within a period of 15 days from the date of allotment;

·         Return is to be filed with the registrar of the companies;

·         Return is to be filed along with the complete list of details of all the allottees.

Various Restrictions on The Company Issuing Securities Through Private Placement –

·         The company cannot release any public advertisement or cannot use service of any media, marketing or distribution channels or agents to inform public about private placement offer;

·         The company cannot make any fresh offer or invitation unless allotment with respect to previous offer has been completed or such previous offer / invitation has been withdrawn or abandoned.

Penalty Provisions for Various Failures –

SR. NO.	PARTICULARS	AMOUNT OF PENALTY	DEFAULTERS
1	Penalty for non-filing / late filing of return of allotment.	INR 1000 each day during which the default continues. Maximum amount of penalty cannot exceed INR 25 Lakhs.	Company, promoters and directors
2	Penalty for making offers or accepting money in contravention of section 42 of the Companies Act, 2013	Amount raised through the private placement or INR 2 Crore whichever is lower	Company, promoters and directors

Cost Inflation Index

We generally hear people saying that the goods which we used to buy at INR 10 earlier, the same is now available at say INR 50 the reason for the increase in the price is cost inflation. Taking the cost inflation concept into ‘capitalassets’ it can be said that the cost inflation index is an index which reflects the impact of inflation in the prices of the capital assets.

Under the present article we would try to understand the necessity of indexation in case of capital assets along with the present list of cost inflation index and other relevant concept like the base year.

Necessity of Indexation In Case of Capital Assets –

As we all know, on the basis of the holding period of the ‘capital assets’, they are classified into ‘short term capital assets’ and ‘long term capital assets’.  

Cost Inflation Index is not to be applied in case of ‘short term capital assets’ since the holding period is less. However, in the case of ‘long term capital assets’, the holding period of capital assets is more and hence the inflation effect to the same needs to be given.

The capital assets which is sold out is recorded at the purchase price in the books of account without giving effect to the inflation which results into higher taxation at the time of its sale. Hence, in order to benefit the tax payer and to give inflation effect, the cost inflation index benefit is made available which increases the purchase price, thereby, reducing the net tax payment.

Following is the basic formula for arriving at the long term capital gain –

Full value of consideration                         XXXX

(-) Indexed cost of acquisition       (XXXX)

Long term capital gain                     XXXX

When indexed / inflation benefit is applied to the cost of acquisition, the same is termed as ‘indexed cost of acquisition’.

Cost of Inflation Index List –

Vide notification dated 5^th June, 2017, the new cost of inflation index has been notified and the same is tabulated hereunder for ready reference –

FINANCIAL YEAR	COST INFLATION INDEX
2001-2002	100 (Base Year)
2002-2003	105
2003-2004	109
2004-2005	113
2005-2006	117
2006-2007	122
2007-2008	129
2008-2009	137
2009-2010	148
2010-2011	167
2011-2012	184
2012-2013	200
2013-2014	220
2014-2015	240
2015-2016	254
2016-2017	264
2017-2018	272
2018-2019	280

The base year as mentioned above is 2001-2002 is the first year of the cost inflation index and the index value of the base year is INR 100. Index value of all the year is compared on the basis of the base year.

In case the capital asset is purchased before the base year (i.e. 2001-2002), the purchase value of the said capital assets would be considered as higher of the actual cost or Fair Market Value as on the 1^st day of the base year.

Understanding the cost inflation index with an example –

Let us assume that an asset was acquired in the year 2014-2015 for INR 100 and the same has been sold out in the year 2018-2019. In such case indexed cost of acquisition would be as under –

Indexed cost of acquisition = purchase price of the asset X (Cost of inflation for the year of sale / Cost of Inflation for the year of Purchase)

In above referred example –

Purchase Price = INR 100

Cost of inflation for the year of sale i.e. 2018-2019 = 280; and

Cost of Inflation for the year of purchase i.e. 2014-2015 = 240

Therefore Indexed cost of acquisition = 100 * [280/240] = 100*1.167 = 116

Thus understanding in simple terms, goods bought for INR 100 in the year 2014-15 the same goods can be bought at INR 116 in the year 2018-2019.