FEBRUARY 15, 2020

By Yogesh Shah, Vimal Desai and Divesh Harpalani

(1) New Tax Regime :

(a) Brief Background

IN the wake of economic development sand for attracting inbound investments, it was necessary to have competitive corporate tax rates, just like many countries the world over. So, the government brought in the Taxation Laws (Amendment) Act, 2019 to provide additional fiscal stimulus, attract investment, generate employment and boost the economy.

Vide the aforesaid Act, a benefit was given to companies by allowing them an option to pay tax at a lower rate of 15 percent/22 percent(as against the existing 25 percent/30 percent) by opting to pay tax under Section 115BAB and 115BAA of the Income Tax Act, 1961 ('Act') respectively. The companies which opt to pay tax under this new regime have restrictions in claiming certain deductions/allowances.

Similarly, other forms of entities also demanded and expected a similar reduction in tax rates so as to have a level playing field with corporates.

(b) Proposed Amendment:

The government, vide the Finance Bill, 2020, proposed to extend such benefit for individuals/HUFs as well as for co-operative societies.

It appears that after a long period of time co-operative societies have been able to attract the attention of the government in the Budget. The government has proposed to introduce a new section 115BAD for co-operative societies whereby the societies that opt to pay tax under this section shall have to pay tax at a lower rate of 22 percent (plus education cess and surcharge at 10 percent) as against the existing 30 percent (plus education cess and applicable surcharge).

As in case of corporates, such co-operatives shall also not be entitled to the benefit of claiming deductions under Chapter VI-A, Section 10AA, Section 32(1)(iia) i.e. additional Depreciation, Section 32AD, Section 32AB, Section 32ABA, Section 35AD, Section 35CCC, Section 35(2AA) as well as clauses (ii), (iia) and (iii) of Section 35(1) of the Act. Further, the unabsorbed additional depreciation or brought forward loss to the extent pertaining to any of these deductions/exemptions, shall not be available for set-off to such co-operatives which opt to pay tax under the new regime.

Apart from the above, for co-operatives opting for new regime, the provisions of Section 115JC of the Act, i.e. the Alternative Minimum Tax (AMT) shall not be applicable. Also, the brought forward credit u/s 115JD pertaining to AMT shall lapse once the co-operative opts for the new tax regime.

The co-operative societies which opt for paying tax under the new tax regime shall have to exercise this option before the due date of filing of return u/s 139(1) for any of the assessment years beginning from AY 2021-22. However, it is pertinent to note that this option, once exercised, cannot be withdrawn. It must also be noted that corporates can opt for the new tax regime for the current financial year (2019-20), while co-operatives can do so only from next financial year 2020-21.

(c)   Impact Analysis:

Currently, the deduction under Section 80P of the Act is a major attraction and benefit for co-operative societies.

Section 80P allows 100 percent deduction of profits earned by a co-operative society if the same is attributable to activities specified in Section 80P(2)(a) or (b) of the Act, viz. cottage industry, supplying milk, oilseeds, fruits or vegetables raised or grown by its members (subject to certain conditions), activities of primary agricultural credit society, etc.

Under Section 80P(2)(c), co-operative societies are allowed to claim a standard deduction of INR 50,000 (INR 1,00,000 in case of consumer co-operative societies) under Section 80P of the Act.

Moreover, under Section 80P(2)(d), the co-operatives are allowed a full deduction of interest earned or dividend received from investment in other co-operative societies.

However, once the co-operative society opts for the new tax regime, it shall no longer be eligible to claim deduction u/s 80P of the Act. Accordingly, out of all the aforementioned deductions/exemptions that the co-operatives shall have to forego, the major loss of benefit pertains to Section 80P of the Act.

As far as provisions of Section 115JC of the Act and carried forward AMT is concerned, it does not seem to have any major impact, since major co-operatives are not covered under AMT for the reason that the deduction u/s. 80P is allowed while calculating the AMT.

In light of the above, it becomes indispensable for all co-operative societies to make a thorough analysis of whether or not they are better off by opting for the new tax regime, given that the new tax regime shall entail losing the benefit of major deductions/exemptions, specifically that available under Section 80P of the Act; as against which there is a benefit of the lower tax rate. It is imperative to have such analysis based on future projections as the option exercised to opt for lower rate is irreversible.

It appears that it would be difficult decision to make for co-operatives which have pending before appellate authorities, claim under Section 80P. But commercial co-operative banks which are presently not eligible to claim deductions under Section 80P of the Act, may opt for the new tax regime.

The co-operative sector is one of the large employment generation sectors. Despite such facts, the benefit of Section 80JJAA (for employing additional workforce) is not granted to co-operatives under the new tax regime while the same is already available to individuals/HUFs and corporates even under the new tax regimes. It is expected that government may consider this amendment in favour of the co-operatives before enacting the Bill into Act.

This benefit given by the government to co-operative societies is in line with its aim of doubling the income of farmers by 2022. Moreover, this step shall significantly help in increasing investments in the dairy sector, also in line with the government's aim of doubling the production of milk in India, which is already the world's largest milk producer. All in all, this step is expected to create more employment in the agriculture, animal husbandry and allied activities.

(2) TDS from interest paid to members under Section 194A of the Act

(a) Existing Provision:

Section 194A of the Act governs interest other than interest on securities. Sub-section (3) of said section provides for circumstances where tax is not required to be deducted. Clause (v) of the said sub-section provides circumstance to be the income credited or paid by a co-operative society (other than a co-operative bank) to a member or to income credited or paid by a co-operative society to any other co-operative society. Clause (viia) of the said sub-section provides circumstances where the income credited or paid in respect of deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank and deposits (other than time deposits) with a co-operative bank other than a co-operative society or bank engaged in carrying on the business of banking.

(b) Proposed Amendments:

Vide Finance Bill, 2020, the ambit of this Section 194A is proposed to be widened so as to include interest paid by large co-operative societies which were earlier not required to deduct tax owing to clauses (v) and (viia) of Sub-Section (3) mentioned above. Accordingly, if total sales, gross receipts or turnover of the co-operative society exceeds fifty crore rupees during the immediately preceding financial year is now required to deduct tax from the interest paid to its members, Threshold limit is INR 50,000 in case of senior citizens and INR 40,000 in other cases.

(c) Impact Analysis:

The said change in the provisions of Section 194A of the Act may increase the administrative work considering huge numbers of members coupled with the fact that most co-operatives which are recipients of large amounts of interest from other co-operatives, will have to claim refund of such deduction because of claiming deduction for such interest income under section 80P of the Act.

(3) TCS on sale of goods for consideration exceeding INR 50 lakh under Section 206C of the Act

Section 206C of the Act is proposed to be widened whereby the seller of goods having total turnover/ gross receipts exceeding INR 10 crore during the immediately preceding financial year shall be liable to collect tax from the buyer at 0.1% of the sale consideration exceeding INR 50 lakh.

This amendment would apply across all type of assessees. Accordingly, large co-operatives having their turnover above the aforementioned limit, shall also be required to collect taxes at sources as mentioned above.

With appropriate mechanism already in place for bringing such large transactions under the tax net through GST, it appears that this proposed amendment shall increase the compliance burden on co-operative societies amongst others.

(Yogesh Shah, Partner, Vimal Desai, Senior Manager and Divesh Harpalani, Senior Associate with Deloitte Haskins & Sells LLP. The views expressed are strictly personal.)