Page 64 - DHC Budget Book 2021-22 Final

INDIA BUDGET 2021-22
5.1
Definition of the term “Liable to Tax” [Sec.2(29A)] [w.r.e.f. AY 2021-22]
— The Act currently does not define the term “Liable to Tax” though this term is used in Sec. 6 (Provision in relation to residency), Sec. 10(23FE) and various agreements as referred to in Sec.90 or Sec. 90A.
— Therefore, it is proposed to insert Clause 29A to Sec. 2 to define the term “Liable to Tax”.
The term “Liable to Tax” in relation to a person means that there is a liability of tax on that person under any law in any country and will include a case where subsequent to imposition of such tax liability, an exemption has been provided.
Comments:
— The term “Liable to Tax” has been the key to
the definition of term “resident” in various tax treaties entered into by India. For instance, Article 4(1) of India- US DTAA define resident as under:
“4(1) For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State,
is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that
(a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and......”
The proposed definition of “Liable to Tax” under the Act may be interpreted to be broader than the DTAA as it states “that there is a liability of tax on that person under any law of any country” and a view may be taken that a taxpayer may qualify as a tax resident of every state in which
it pays any tax instead of the State wherein such taxpayer is liable to tax by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.
In addition, there is a view which prevails that the expression “tax” covers taxes as defined under Article 2 of respective DTAAs. However, the proposed definition broadens the same as it uses the term “liability of tax on that person under any law of any country” instead of specific taxes as defined in Article 2 of DTAAs.
Accordingly, one may take a view that the definition is wider than what is implicit in the DTAAs. Accordingly, a clarity may be provided to align the proposed definition as per the implicit meaning under the DTAA.
Besides above, the term “Liable to Tax” has been subject matter of dispute in India as under:
(a)“Liable to Tax” vis-a-vis “Actual Payment of Tax”
The Hon’ble Apex Court in the case of UOI vs. Azadi Bachao Andolan [2003] 132 Taxman 373 (SC) has held that “Liable to Tax” does not mean actual payment of tax. A view
may be taken that the proposed insertion is in line with the view of the Apex Court as it states that “Liable to Tax” means liability of tax on a person and includes a case where after imposition of tax, exemption has been granted. Hence, actual payment of tax is not mandatory for being “Liable to Tax”.
(b)“Liable to Tax” does not include cases where the income is exempt
The Hon’ble Apex Court in the above judgment also held that cases where a person is subject to comprehensive taxes
but who enjoys a specific exemption from
tax is nevertheless “Liable to Tax”. However, the proposed definition covers a case where subsequent to imposition of tax liability, an exemption has been provided. Accordingly,
an entity which is exempted from tax on satisfaction of certain requirements of the law under that State may be outside the ambit
of definition of “Liable to Tax” under the Act. The said implication may be viewed as not in alignment with the view held by the Hon’ble Apex Court. Accordingly, a clarity on this front shall be well appreciated.
(c) “Liable to Tax” does not include cases wherein there is absence of tax laws in a State
There have been judgements in which taxpayer has been granted benefit of DTAA despite absence of tax laws in their State. For instance, in the facts of the judgement of ADIT (IT) vs. Green Emirate Shipping
& Travels [2006] 100 ITD 203 (Mum.), the
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