The Finance Bill, 2021 (the Bill) was introduced by the Finance Minister in the Lok Sabha (i.e., lower house of Parliament) on 1 February 2021. On 22 March 2021, supplementary amendments to the Bill have been tabled in the Lok Sabha by notice of amendments. The revised Bill has been passed by the Lok Sabha as well as Rajya Sabha and is now awaiting assent of the President. The key supplementary amendments are summarised hereunder:
Definition ‘liable to tax’ substituted
While the term ‘liable to tax’ is used in various sections of the Income-tax Act, 1961 (IT Act), it is not defined in the IT Act. Hence, the Bill proposed to insert a new clause (29A) in section 2 of the IT Act to provide for definition of the term ‘liable to tax’.
As the proposed definition did not capture the nature of tax, there was an ambiguity as to the taxes that could come within the ambit of section 2(29A) of the IT Act.
It is now proposed to substitute the definition of the term ‘liable to tax’. As per the new definition, liable to tax (in relation to a person and with reference to a country) means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country.
Reconstitution of Firms / Association of Person / Body of Individual
As per section 45(4) of the IT Act, capital gains arising from transfer of a capital asset by way of distribution on dissolution or reconstitution of firm shall be chargeable to tax under the head ‘capital gains’ as income of the firm in the year of distribution. Similar provisions apply where assets are distributed by AOP / BOI to its members.
The Bill proposes to substitute sub-section (4) and introduce a new sub-section (4A) to section 45 of the IT Act to remove uncertainty regarding applicability of said provisions to a situation where assets are revalued, or self-generated assets are recorded in the books of account and payment is made to partner/member exceeding his capital contribution.
It is now proposed to omit sub-section (4A) and insert new section 9B in the IT Act. As per this new provision, the profit or gains arising from transfer of capital asset or stock in trade or both by the specified entity1 to the specified person2 in connection with the dissolution or reconstitution3 of such specified entity shall be deemed to be the income of the specified entity of the fiscal year in which such capital asset or stock in trade or both is received by the specified person. The gains arising from such deemed transfer shall be taxable either under the head ‘Capital gains’ or ‘Profits and gains of business or profession’ in accordance with the provisions of the IT Act. The fair market value of the capital asset or stock in trade or both on the date of its receipt by the specified person shall be deemed to be the full value of consideration.
Substitution of section 45(4) proposed to be inserted in the IT Act by the Bill
Further, it is now proposed to substitute section 45(4) as proposed in the Bill so as to bring ‘money’ apart from capital asset within its ambit. Thus, post this proposed amendment, section 45(4) shall be applicable to money or capital asset or both. Further, it is now proposed to restrict the applicability of this section only on reconstitution of the specified entity. It is also proposed to provide following formula for computing profit or gains in the hands of specified entity:
A=income chargeable to income-tax under this sub-section as income of specified entity under the head “Capital gains”
B=value of any money received by the specified person from the specified entity on the date of such receipt;
C=the amount of fair market value of the capital asset received by the specified person from the specified entity on the date of such receipt; and
D=the amount of balance in the capital account (represented in any manner) of the specified person in the books of accounts of the specified entity at the time of its reconstitution
If the value of “A” above is negative, its value shall be deemed to be zero and that the balance in capital account shall be calculated without taking into account increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset.
The terms ‘specified entity’, ‘specified person’ and ‘reconstitution’ shall mean the same as appearing in proposed section 9B of the IT Act.
It is also proposed that the amount chargeable to income-tax as income of specified entity which is attributable to the capital asset being transferred by the specified entity under section 45(4) shall be allowed as deduction to the specified person for computing the capital gains.
Amendment in section 50B of the IT Act
Section 50B of the IT Act contains computation mechanism in case of slump sale. While it contains the provision for computing cost of acquisition, it does not contain provision for the computing full value of consideration in relation to the transfer of the undertaking under a slump sale.
It is now proposed to substitute sub-section 2 of section 50B of the IT Act to deem fair market value of capital asset as on the date of transfer as full value of consideration received or accruing as a result of slump sale. Further, Explanation 2 to section 50B of the IT Act it is proposed to be amended to treat the value of capital asset being goodwill of a business or profession which has not been acquired by taxpayer by purchase from previous owner as NIL.
Amendment in section 115JB of the IT Act
Section 115JB of the IT Act provides for MAT at the rate of 15% of book profit, in case tax on the total income of a company computed under the normal provisions of the Act is less than 15% of book profit. Book profit for this purpose is computed by making certain adjustments to the profit disclosed in the profit and loss account prepared by the taxpayer.
With a view to grant relief in cases where MAT liability has arisen in year of repatriation of APA or secondary adjustment amount, the Bill proposed to insert sub-section (2D) in section 115JB of the IT Act to provide for filing of rectification application by taxpayer in whose case book profits of current fiscal year are higher on account of inclusion of income from APA or a secondary adjustment.
It is now proposed that to claim the deduction, the taxpayer should not have utilised the credit of tax paid under section 115JB in any subsequent assessment year under section 115JAA of the IT Act. It is also proposed that the taxpayer can make an application for re-computation of book profit for the years beginning on or before fiscal year 2019-20.
Where there is any tax refund arising on account of adjustment referred in section 115JB(2D), it is proposed that the taxpayer shall not be eligible to claim the interest on such refund.
Definition of written down value (WDV) amended
The Bill has proposed not to treat goodwill as an asset entitled for depreciation. Accordingly, the relevant provisions were amended. However, section 43(6) of the IT Act which deals with the definition of ‘written down value’ was not amended.
It is now proposed to amend section 43(6)(c) of the IT Act to provide that:
- The WDV of the block not to be increased by the cost of acquisition of goodwill of a business or profession; and
- The WDV of the block to be reduced by the WDV of the goodwill falling within the said block
SECTOR SPECIFIC PROPOSAL
As per the existing provisions of section 10(10D) of the Act, any sum received including by way of bonus under a life insurance policy is exempt in the hands of policyholder, provided the amount of the premium does not exceed 10% of the actual capital sum assured. The above provisions are equally applicable to ULIP products.
The Bill has proposed certain amendments with respect to the taxation of ULIP policies and accordingly it is now proposed:
- a. An exemption under section 10(10D) of the Act shall not apply to the ULIP policies (Non-exempt ULIP) issued on or after 1 February 2021, if the amount of premium payable for any of the previous year during the term of the policy exceeds INR 2,50,000;
- In case, the premium is payable by a person for more than one ULIPs issued on or after 1 February 2021 then aggregate premium payment should not exceed INR 2,50,000 during the term of any of the policy;
- Non-Exempt ULIP products will be considered as “Capital Asset” under section 2(14) of the Act;
- Non-exempt ULIP sought to be treated as “Equity Oriented Fund (EOF)” under section 112A of the Act so as to provide same type of tax treatment as unit of EOF subject to minimum equity component (90% -in case of investments in other units listed on a recognized stock exchange or 65% -in any other case i.e. in equity shares of domestic company) as the case may be.
- Computation mechanism under the head “Capital Gains” is to be followed in the manner as prescribed by CBDT in this regard;
- Sum received under ULIP on the death of a policyholder is tax exempt.
It is now proposed to insert a proviso to the effect that the condition of 90% / 60% is to be satisfied throughout the term of such insurance policy.
2. FINANCIAL SERVICES
Incentives for investment division of Offshore Banking Units
Section 10(4D) of the IT Act exempts certain income earned by specified funds located in International Financial Services Centre (IFSC), such as:
i. capital gains from transfer of certain capital assets listed on recognized stock exchanges in IFSC;
ii. transfer of certain securities (other than shares in an Indian company);
iii. any income from securities issued by a non-resident, subject to certain conditions.
The Bill has proposed to extend benefit for investment division of Offshore Banking Units. For this purpose, the Bill proposed to define specified fund to include investment division of Offshore Banking Unit which has been granted a Category-III Alternative Investment Fund (AIF) registration.
It is now proposed to amend the definition of ‘specified funds’ to be made applicable to investment division of Offshore Banking Unit which has been granted a Category-I Foreign Portfolio Investor (FPI) registration instead of Category-III AIF registration.
Tax incentives for aircraft leasing unit located in IFSC
In order to boost undertaking of aircraft leasing activities in IFSCs, the Bill proposed to introduce section 10(4F) in the IT Act, for providing exemption to any royalty income earned by a non-resident from lease of an aircraft to a unit in an IFSC. The exemption is subject to the condition that the unit in the IFSC has commenced operations by 31 March 2024.
It is now proposed to extend this exemption to interest income earned by a non-resident from aircraft leasing to a unit in IFSC. It also proposed to define ‘aircraft’ to mean an aircraft or a helicopter, or an engine of an aircraft or a helicopter, or any part thereof.
Further, the Finance Bill also proposed to amend section 80LA of the IT Act to provide for 100% deduction of incomes earned by a unit in IFSC from transfer of aircraft or aircraft engine which was leased to a domestic company engaged in the business of operation of aircraft. The deduction is subject to the condition that the unit in IFSC transferring the aircraft has commenced operations by 31 March 2024.
It is now proposed to limit this deduction to transfer of aircrafts. Furthermore, it also proposed to remove the condition pertaining to transferring to domestic company engaged in business of operation of aircraft. Hence, it is now proposed that the deduction under section 80LA of the IT Act will be available to the transfer of aircraft which was leased to a person.
Relaxations in conditions for investments made by Sovereign Wealth Funds and Pension Funds
Section 10(23FE) of the IT Act provides exemption from interest, dividend and capital gains arising from specified infrastructure related investments in India by specified persons, including Sovereign Wealth Funds and Pension Fund. SWFs and PFs can claim the exemption upon satisfaction of certain conditions, however, were unable to satisfy some of these conditions, resulting in limited offtake of the benefit by such funds. In order to encourage more SWFs and PFs to apply for this exemption and thereby make the eligible investments in India, the Finance Bill had proposed to relax some of the conditions in relation to the mode and manner of investment.
In order to extend the benefit of the provisions, these conditions have been further relaxed and it is now proposed to allow Category I or Category II AIF in which SWFs / PFs have invested, to make investments in the following entities:
- A holding domestic company, set up and registered on or after 1 April 2021 and having at least 75% investment in one or more infrastructure companies or enterprises;
- Allowing investment in an NBFC registered as an Infrastructure Finance Company as referred to in Notification number RBI/2009-10/316 or in an NBFC as referred to in the Infrastructure Debt Fund-Non-Banking Financial Companies (Reserve Bank) Directions, 2011, having at least 90% lending to one or more infrastructure companies or enterprises.
Consequently, if the aggregate investment of holding company in infrastructure company or companies or NBFC-IDF/IFC is less than 100%, proportionate exemption will be allowed.
Exemption from capital gains in respect of relocation of funds
In order to boost the relocation of offshore funds to the IFSC, the Bill proposed to introduce section 10(23FF) in the IT Act, whereby capital gains earned by a non-resident on transfer of shares of an Indian company by a ‘resultant fund’ in IFSC shall be exempt from tax, subject to the conditions prescribed.
In order to further extend the benefit of this provision, it is now proposed to exempt capital gains earned by ‘specified fund’ on transfer of shares either by the ‘resultant fund’ or ‘specified fund’, where such units which are held by the non-resident are not attributable to any permanent establishment in India.
Further, the provision of the section shall also apply where shares of the Indian company were transferred from the original fund or from its wholly owned special purpose vehicle. Consequently, the term ‘specified fund’ is defined in explanation to Section 10(4D) of the IT Act.
Furthermore, the Bill has proposed consequential amendments in:
- Clause (viiac) inserted in section 47 of the IT Act to consider transfer of a capital asset from the original fund to the resultant fund as a tax neutral transfer.
- Clause (viiad) inserted in section 47 of the IT Act to consider exchange of shares / units / interest held by an investor in the original fund against shares / units / interest in the resultant fund as a tax neutral transfer.
It is now proposed to extend these amendments (i.e. clause (viiac) and (viiad)) to wholly owned special purpose vehicle of such original fund. Furthermore, it also proposed to treat the transfer as relocation where the consideration is paid to the original fund in respect of which the share or unit or interest is not issued by the resultant fund to its shareholder or unit holder or interest holder.
Expanding the scope of definition of Global Depository Receipts (‘GDRs’)
Under the provisions of Section 115ACA of the IT Act, tax would be chargeable at 10% in case of resident individuals who are an employee of an Indian company or its subsidiary engaged in the prescribed industry or services earns dividend income and long-term capital gains from the GDRs issued by the Indian Company.
As per the existing provisions, GDRs include depository receipt or certificate issued by Overseas Depository Bank outside India and issued against:
- ordinary shares of the company listed on a recognized stock exchange in India; or
- foreign currency convertible bonds of the company.
It is now proposed to amend the definition and extend this benefit to GDRs issued by Overseas Depository Bank in an IFSC. Further, it is proposed to expand the scope of the underlying asset to include ordinary shares of the company incorporated outside India, where such GDRs are listed and trade on any IFSC.
Rationalisation of taxability of income earned by specified funds
Section 115AD of the Act provides a special tax regime for income from securities earned by FPIs and ‘specified funds’ being Category-III AIFs located in IFSC, subject to certain conditions.
The Finance Bill proposed to amend the provision of section 115AD of the IT Act to extend this regime to the investment division of an Offshore Banking Unit.
The term specified fund under the above provisions is defined as per clause (c) of the Explanation to Section 10(4D) of the IT Act. This clause has already been amended to include investment division of an Offshore Banking Units. Therefore, the above proposed amendment has been omitted and subsequent amendments have been made in sub-section (1B) and sub-section (2) of Section 115AD.
The Finance Bill proposed that the provisions of the newly inserted sub-section (1B) of Section 115AD was applicable to funds making investment who are registered as Category-III FPIs under the SEBI (FPI) Regulations, 2019. However, as per the SEBI (FPI) Regulations, 2019 there are 2 categories of FPI Category-I and Category-II FPIs. Therefore, it is proposed to amend the above and substitute Category-I FPIs to be commensurate with the provisions of SEBI (FPI) Regulations, 2019.
Expanding the scope of definition of Investment Fund
As per the provisions of Section 115UB of the IT Act income earned by a unit holder of an investment fund will be charged to tax in the same manner as if the investment was directly made by the unit holder.
As per the exiting provisions, investment fund means, any fund which has been incorporated in India as a trust, company, LLP or body corporate and has been granted registration as Category-I or Category-II AIF and is regulated under the SEBI (AIF) Regulations, 2012.
It is now proposed to widen the scope of definition to include Category-III AIF which are registered as per the International Financial Services Centres Authority Act, 2019.
No tax on Income of the Institution established to finance infrastructure and development
It is now proposed to introduce two new clauses (48D) and (49E) in section 10 of the Act to provide an exemption for income for a period of 10 consecutive years on income arising to Financing Institution that are assisted by Government to promote the long-term finance to infrastructure or such other sector. In case of Development Financing Institution (DFI), initially the exemption is provided for 5 years which can be extended for further period of 5 years, subject to fulfilment of necessary conditions.
The above-mentioned amendment is in line with the budget speech wherein the Finance Minister has referred the need for long term debt financing to infrastructure or such other sector.
Taxability of interest on PF Account – threshold enhanced
As per section 10(11) of the IT Act, payment from a recognised or notified PF is exempt. Similarly, as per section 10(12) of the IT Act, interest payable with respect to withdrawal of accumulated balance due and becoming payable to an employee participating in a recognised provident fund is exempt.
With a view to cap the exemption limit on interest income, the Bill proposed that interest income accrued during the fiscal year shall be taxable to the extent it relates to the amount or aggregate of amounts of contribution exceeding INR 250,000 made in a fiscal year on or after 1 April 2021.
It is now proposed to enhance the cap from INR 250,000 to INR 500,000 subject to the condition that the employer does not make any contribution in such fund.
Hindu Undivided Family (HUF) excluded from presumptive taxation
As per section 44ADA of the IT Act, subject to certain conditions, profits of the professionals are presumed at 50% of the gross receipts or the income offered, whichever is higher. The professionals opting for this scheme are neither required to maintain books of accounts under section 44AA of the IT Act nor get their accounts audited under section 44AB of the IT Act.
The Bill proposed to exclude Limited Liability Partnership (LLP) from section 44ADA of the IT Act. While the Bill proposed to exclude LLP, it made section 44ADA applicable to HUF.
It is now proposed to exclude HUF also from the ambit of section 44ADA.
Amendment of section 234F of the IT Act
As per section 234F of the IT Act, where the tax return is not filed within the due date of filing the tax return, a fee of INR 5,000 (if the tax return is filed before 31 December immediately succeeding fiscal year) or INR 10,000 (if the tax return is filed before 31 March) would be levied. The Bill has reduced the deadline for filing belated tax return to 31 December immediately succeeding fiscal year.
As the tax return cannot be filed post 31 December, the levy of fee of INR 10,000 becomes redundant. Hence, it is now proposed to provide fee of INR 5,000 if the tax return is not filed before the due date of filing the tax return.
Fees for default relating to intimation of Aadhaar number
Section 139AA(2) of the IT Act mandates every person who is eligible to obtain Aadhaar number to intimate Aadhaar number to the prescribed authority.
It is now proposed to levy fee of up to INR 1,000 if a person fails to make such intimation.
‘Asset’ defined for the purpose of reassessment
A concluded matter can be reopened where the tax authority has reasons to believe that any income chargeable to tax has escaped assessment. As per section 149 of the IT Act, the time limit for issuance of notice for reassessment is 6 years from the end of the year immediately succeeding the fiscal year.
The Bill has proposed to reduce the time limit for the issuance of such notice to 3 years as against the existing 6 years. However, in serious tax evasion cases, where there is an evidence of concealment of income (represented in the form of asset) of INR 5mn or more in a year, the time limit of 10 years has been proposed. The Bill is silent on the definition of asset.
It is now proposed to provide definition of the term ‘asset’ to include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account.
Power to revise orders prejudicial to revenue extended to Principal Chief Commissioner / Chief Commissioner
Section 263 grants power to Principal Commissioner/Commissioner to call for and examine the record of any proceedings under the IT Act if he considers that the order passed by the Tax Officer is erroneous and prejudicial to the interest of revenue.
It is now proposed to extend this power to Principal Chief Commissioner/Chief Commissioner also.
Equalisation Levy (EL)
The Bill has proposed to amend section 165A of the Finance Act, 2016, to provide that consideration received or receivable from e-commerce supply or services shall include consideration for sale of goods irrespective of whether the e-commerce operator owns the goods; and consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.
It is now proposed to amend the Bill to exclude following from the levy of EL:
- consideration on sale of goods which are owned by a person resident in India or by a Permanent Establishment (PE) in India, if sale of such goods is effectively connected with such permanent establishment.
- consideration for provision of services which are provided by a person resident in India or by PE in India if provision of such services is effectively connected with such PE.
The amendments to the Bill address some concerns/anomalies, some amendments may add to the agony of a certain section of taxpayers. The amended Bill has missed addressing certain issues which have been highlighted by some stakeholders.
1specified entity means a firm or association of persons or body of individuals (not being a company or a co-operative society)
2Specified person means a person, who is a partner of the firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year
3Reconstitution of the specified entity means, where-
- one or more of its partners or members, as the case may be, of such specified entity ceases to be partners or members; or
- one or more new partners or members, as the case may be, are admitted in such specified entity in such circumstances that one or more of the persons who were partners or members, as the case may be, of the specified entity, before the change, continue as partner or partners or member or members after the change; or
- all the partners or members, as the case may be, of such specified entity continue with a change in their respective share or in the shares of some of them