The Finance (No. 2) Bill 2019 (the Bill) was introduced by the Finance Minister in the Lok Sabha on 5 July 2019. Subsequently, on 18 July 2019, the amendments to the Bill have been tabled in the Lok Sabha by notice of amendments. The key amendments are summarised hereunder:
1. Taxability of the gift made to non-resident
As per the provisions of section 5 of the Income-tax Act, 1961 (the IT Act), a non-resident is taxable in India only in respect of income that accrues or arises in India or deemed to accrue or arise in India or is received in India or is deemed to be received in India. Accordingly, a non-resident taxpayer on receiving gifts from resident adopts a position that such gifts are not taxable in India on the premise that income from gifts did not accrue or arise in India.
To plug this lacuna, the Bill proposed to insert a new clause (viii) in section 2(24) of the IT Act so as to widen the scope of ‘income deemed to accrue or arise in India’ to include sum of money or specified property situated in India received from a resident on or after 5 July 2019.
It is now proposed to amend the proposed clause (viii) to provide that any sum of money paid outside India by a person resident in India to a non-resident on or after 5 July 2019 to be treated as ‘income deemed to accrue or arise in India’
The proposed amendment seems to have increased the scope of taxable income and may result in extra territorial operation. This is likely to have far reaching implications for the non-resident taxpayer receiving such monies.
2. International Financial Services Centre (IFSC)
Section 47(viiab) of the IT Act provides that the transfer of a capital asset (being bonds/global depository receipts / rupee denominated bond of an Indian Company / derivatives) shall not be regarded as transfer and accordingly not liable to capital gains tax.
The Bill proposed to extend the scope of these provisions to include transfer of the above specified securities by Category III AIFs located in an IFSC subject to fulfilment of certain conditions.
It is now proposed to treat the transfer of above specified securities by Category III AIFs as transfer and grant exemption to the gains arising from such transfer of capital assets subject to fulfilment of following conditions:
- The Category-III AIF’s are regulated by SEBI
- It is located in any IFSC
- Of which all their unit are either held by non-residents other than units held by a sponsor or manager
Further, it also proposed to remove the condition of deriving income solely in convertible foreign exchange.
3. Incentive for investment in Venture Capital Undertaking by Category II – AIF
Presently, section 56(2)(viib) of the IT Act provides that where a specified company receives consideration from a resident for issue of shares which exceeds its face value, the consideration in excess of fair market value shall be chargeable to tax. However, this provision did not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund, including Category I - AIF.
The Bill proposed to extend the relaxation to consideration received from Category II – AIF as well by inserting new clause (aa) to Explanation to section 56(2)(viib) of the IT Act. However, the proposed clause while proposed clause contained the reference to Category II – AIF, it did not contain reference to Category I – AIF. Thus, shares issued to Category I – AIF comes within the ambit of section 56(2)(viib) of the IT Act.
This not being the intention of legislature, it is now proposed to rectify this error by giving reference of Category I – AIF in the proposed clause (aa) to Explanation to section 56(2)(viib) of the IT Act.
4. Deemed taxation in the year of non-compliance of prescribed conditions
Clause (ii) of the first proviso to section 56(2)(viib) of the IT Act granted exemption in respect of consideration for issue of shares received by a company from the specified class or classes of persons.
The Bill proposed to tax the excess of consideration over face value of shares in the year in which the conditions specified in the notification issued under clause (ii) of the first proviso is not satisfied.
It is now proposed to amend this and provide that the difference between the fair market value and the consideration shall be taxed in the year in which conditions specified in the notification are not satisfied. Further, it is also proposed to extend that ambit of penalty provisions contained in section 270A(8) and section 270A(9)of the IT Act to this default , by treating such shortfall as misreporting by the Company.
5. Withholding tax proposals
Withholding tax at the time of purchase of immovable property
Section 194-IA of the IT Act provides for withholding tax @1% on the amount of consideration for transfer of any immovable property (other than agricultural land). However, the term consideration was not defined in the Act.
Hence, the Bill proposed to insert Explanation (aa) to section 194-IA of the IT Act to provide for the definition of consideration for immovable property.
As the section refers to ‘consideration for transfer of any immovable property’, it is now proposed to amend Explanation (aa) by amending ‘consideration for immovable property’ with ‘consideration for transfer of any immovable property’
Withholding tax compliance for individuals / HUFs on payment to contractors, brokers, agents and professionals
Currently, only individuals or HUFs subject to tax audit are required to withhold tax while making payment to contractors or professionals or agents.
The Bill proposed to insert new section 194M of the IT Act wherein individual or HUF not covered by current provisions would be required to withhold tax @ 5% from payment made to a resident for any contractual work or towards professional fees, if such payment exceeds INR 5 mn during a fiscal year.
It is now proposed to amend this and extend the applicability of section 194M to the payments in nature of commission or brokerage as well.
Withholding tax on cash withdrawals from Banks
With an objective to discourage cash transactions, the Bill proposed to insert new section 194N in the IT Act. As per the proposed section, a bank or post office would be required to withhold tax @2% from cash withdrawal exceeding INR 10 mn during the fiscal year from an account maintained by a taxpayer with such bank or post office.
After the budget proposal, there was an ambiguity as to whether the withdrawal should be account specific or person specific.
To give a clarity on this, it is now proposed to amend this section to provide that the limit of INR 10 mn shall be aggregate of one or more account. Further, it is also proposed to amend section 198 of the IT Act to provide that the sum withheld in accordance with the provisions of section 194N of the IT Act shall not be deemed to be income received.
This amendment shall come into effect from 1 September 2019.
Lok Sabha has passed the Finance (No. 2) Bill 2019 with the above amendments and now the Finance (No.2) Bill lies with the Rajya Sabha. While the above amendments to the Finance Bill address some concerns/anomalies, some amendments may add to agony of a certain section of taxpayers. The amended Finance Bill has missed to address some of the issues which have been highlighted by some stakeholders.