The Finance Bill, 2022 (the Bill) was introduced by the finance minister in the Lok Sabha on 1 February 2022. On 24 March 2022, the amendments to the Bill have been tabled in the Lok Sabha by notice of amendments. The Bill so amended has been passed by Lok Sabha on 25 March 2022. The key amendments proposed by the notice of motion amendments are summarized hereunder:
Definition of ‘books or books of accounts’ amended
It has been proposed to widen the scope of ‘books’ or ‘books of accounts’ defined under the Income-tax Act, 1961 (IT Act) by including accounts maintained in electronic or in digital form or printouts of data stored in such electronic or digital form within the definition of ‘books’ or ‘books of accounts.
- Tax exemption to specified funds in IFSC
Section 10(4D) of the IT Act provides an exemption in respect of any income earned by ‘specified funds’ in IFSC subject to certain prescribed conditions. One of the conditions for the specified funds is that all the units should be held by non-residents other than units held by a sponsor or manager. It is proposed to provide an exception to unitholders who become residents in the subsequent year post allotment of units and the aggregate value and number of units do not exceed 5% of the total units issued.
- TDS is applicable on long term capitals gains after considering an exemption
Long-term capital gains arising from the transfer of securities and subject to certain conditions are exempt up to INR 1 lakh as per section 112A of the IT Act. It is now proposed to clarify that the First Schedule prescribing deduction of tax at source at the rate of 10% should be deducted only if the gains exceed the exemption limit of INR 1 lakh.
Taxation of Virtual Digital Assets
The Bill proposed to introduce a new scheme of taxation for virtual digital assets. The Bill proposed to introduce section 115BBH in the IT Act laying down the mechanism for computing taxes at the rate of 30% on the gains earned by transfer of such virtual digital assets.
It is now proposed to introduce a non-obstante clause in the proposed section to make it a separate code for computing tax on the transfer of virtual digital assets.
Further, there was an anomaly whether loss arising from the transfer of virtual digital assets can be set off against income from other virtual digital assets. It is now proposed to amend the section and provide that loss from the transfer of virtual digital assets shall not be eligible for set-off against the income arising from the transfer of another virtual digital asset.
The term ‘transfer’ used in the proposed provision was not defined. It is now proposed to insert a new sub-section (3) to section 115BBH of the IT Act, to define the term ‘transfer’ as per section 2(47) of the IT Act. While the definition of ‘transfer’ contained in section 2(47) of the IT Act applies to capital assets, it is proposed that the said definition shall apply to virtual digital assets irrespective of whether they are considered capital assets.
The Bill has proposed tax withholding in respect of the virtual digital asset. It is now proposed that where transaction relating to a virtual digital asset is also covered by section 194-O (i.e. tax withholding in respect of the purchase of goods) then the tax withholding shall be as per the provisions applicable to TDS on transfer of virtual digital asset.
Clarifications related to provisions for filing updated income-tax return
The Bill has proposed to introduce a new provision to enable taxpayers to file an updated tax return subject to fulfillment of certain specified conditions. Such a return can be filed within 24 months from the end of the relevant assessment year. However, the proposed provision restricted the filing of such returns if the taxpayer falls within the ambit of prescribed disqualifications. One of the said disqualifications is that where a search is initiated, or survey is conducted, or requisition is made the taxpayer will be ineligible to file an updated income-tax return for the relevant year and two years preceding such year. It is now proposed to remove the limit of two years. Thus, updated return cannot be filed in case the taxpayer is subject to specified actions such as search, survey, seizure etc. in the relevant fiscal year as well as preceding fiscal years.
It is also proposed to permit filing an updated tax return in case of loss return only if the updated return is a ‘return of income’. Further, it is also proposed to permit the filing of an updated tax return for each subsequent year where any losses or any claims carried forward as per the provision of Chapter VI or unabsorbed depreciation as per section 32(2) of the IT Act or tax credit as per section 115JAA or section 115JD of the IT Act is reduced due to filing of an updated tax return of the earlier year.
Amendment of section 153 of the IT Act
As per section 153 of the IT Act, no order of assessment under section 143 or section 144 of the IT Act shall be made after the expiry of twenty-one months from the end of the assessment year in which the income was first assessable.
It is now proposed to shorten the time limit of twenty-one months to eighteen months for completion of assessment relating to the assessment year commencing from 1 April 2020. This amendment is proposed to be effective from the fiscal year 2020-21.
Deduction in respect of Surcharge and Education Cess
The Bill proposed to clarify that the term ‘tax’ includes and shall be deemed to have always included any surcharge or cess, by whatever name called, and thereby the same is not a deductible item. It is now proposed that where the taxpayer has claimed such amount as deductible it shall be construed that the taxpayer has under-reported its income and thereby liable to a penalty. However, such penalty may not be levied if taxpayer suo motu makes an application to the tax officer in a prescribed manner for making necessary adjustments with respect to surcharge or cess claimed by it.
Further, it also proposed that the period of 4 years for passing the rectification order shall be reckoned from the end of the fiscal year 2021-22.
New procedure for filing appeal by the tax authorities on question of law
The Bill proposed to insert a new section 158AB of the IT Act to avoid filing an appeal where a question of law is common and where a decision of the jurisdictional High Court on the same question of law is available, thereby reducing litigation. A different time limit is prescribed for the Commission of Income-tax (Appeals) [CIT(A)] order and Tax Tribunal Order. It is now proposed that the time limit to file such an application shall be one hundred and twenty days from the date of receipt of order for CIT(A) as well as Tax Tribunal Order.
It is also proposed that where the tax authorities have not received an acceptance from the taxpayer that question of law is identical to a case already pending before the authorities, then the Principal Commissioner or Commission shall file an appeal before the Tax Tribunal or the High Court as the case may be.
It is also now proposed to include filing of an appeal to the High Court where the order passed is not in conformity with the final decision on the question of law in the other case.
Further, it is proposed that a time limit of sixty days will be applicable for the appeals to be filed with the Tax Tribunal and a period of one hundred and twenty days will be applicable for appeals to be filed with the High Court from the date on which such order is communicated. Such appeals can be filed by the Principal Commissioner or Commissioner having jurisdiction over the case.
AMENDMENTS RELATED TO SUCCESSOR ENTITY SUBSEQUENT TO BUSINESS REORGANIZATION
- Assessment proceedings in case of business reorganization
The Bill proposed to insert a sub-section (2A) to section 170 of the IT Act to provide that the assessment or other proceedings pending or completed on the predecessor in the event of a business reorganization, shall be deemed to have been made on the successor.
It is now proposed that instead of the term ‘business reorganization’ the term ‘succession’ will be used in the proposed provision. Further, it is also proposed that any proceedings initiated on the predecessor will now be considered to be initiated on the successor.
It is now proposed to make a consequential amendment to provide for a definition of successor and substituting ‘succession’ for ‘reorganization of business’ in the definition of pendency.
- Modified return in case of business reorganization
The Bill proposed to insert a new section 170A to the IT Act wherein entities undergoing business reorganization, the successor is now permitted to file modified returns within 6 months from the end of the month in which the re-organization order is issued.
The term business reorganization1 and successor2 has been proposed to be defined under the notice of the amendment.
Amendment to proposed section 194R of the IT Act
The Bill proposed to insert to new section 194R to the IT Act wherein tax was to be deducted at the rate of 10% on the value of any benefit or perquisite arising from business or profession.
It is now proposed that the taxpayer before releasing the benefit or perquisite should ensure tax that is ‘required to be deducted’ has been paid. Further, it is proposed that the Board can issue guidelines with the prior approval of the Central Government to reduce difficulty in giving effect to the provisions of this section.
1Business reorganization means the reorganization of business involving the amalgamation or de-merger or merger of business of one or more persons.
2Successor means all resulting companies in a business reorganization, whether the company was in existence before such business reorganization.