The Finance Bill, 2023 (the Bill) was introduced by the Hon’ble Finance Minister in the Lok Sabha on 1 February 2023. The amendments to the Bill have been tabled in the Lok Sabha by notice of amendments. The Bill so amended has been passed by Rajya Sabha on 27 March 2023 and is now awaiting assent from President. The key amendments proposed by the notice of amendments are summarised hereunder:
DIRECT TAX RELATED
1. FS Sector
a. Non-applicability of surcharge and education cess on certain income earned by Specified Funds located in International Financial Service Centres (IFSC).
It is now proposed to remove the surcharge and education cess on advance tax computed on income from securities of ‘Specified Funds’ located in IFSC taxed under Section 115AD(1)(a) of the Income-tax Act, 1961 (IT Act).
b. Extension of tax exemption of Income received in IFSC to certain entities.
Section 10(4G) of the IT Act exempts any income received by a non-resident from the portfolio of securities or financial products or funds, managed or administered by any portfolio manager on behalf of such non-resident in an account maintained by an off-shore banking unit or International Financial Services Centre.
It is now proposed to extend the same to persons as may be notified by the Central Government.
c. Exemption of dividend income and capital gains earned by certain IFSC units.
It is now proposed to exempt dividends earned by units located in IFSC, which are primarily engaged in the business of aircraft leasing, provided that such income has been earned from an IFSC unit which is also engaged in the business of leasing an aircraft.
Further, it is also proposed to exempt capital gains earned by units located in IFSC, which are primarily engaged in the business of aircraft leasing on the transfer of equity shares of a domestic company which is located in IFSC and is also primarily engaged in aircraft leasing subject to the condition that it commences operations before 31 March 2026. The exemption is for 10 years beginning from the year of commencement of operations.
d. Taxation of the sum received from the business trust.
The Bill has proposed to introduce section 56(2)(xii) of the Act which is now proposed to be revised to provide that a 'specified sum' received by the unit holder from the business trust is subject to tax in the hands of the unit holders.
The specified sum is computed by applying the following formula:
Specified sum = A-B-C,
Wherein, A= Cumulative distributions made to the unit holders, other than distributions covered under the provisions of section 10(23FC)/ 10(23FCA) of the IT Act and not chargeable to tax under Section 115UA (2) of the IT Act.
B= Issue price
C= Amount already taxed in any of the previous years. If B+C is greater than A, then the specified sum will be NIL.
e. Extension of tax exemption on relocation to certain Funds
Section 47 (viiad) of the IT Act provides for tax exemption on the relocation of certain funds to IFSC.
The definition of original fund under section 47(viiad) of the IT Act has been amended to include certain funds of Abu Dhabi Investment Authority, the Government of Abu Dhabi and funds as may be notified by the government.
f. Mode of Computation of Income from Business Trusts
The Bill provides for tax on certain income from Business Trusts.
Section 48 of the IT Act provides for a mode of computation of capital gains. The amendment now proposes to reduce the cost of the acquisition of a unit of business trust by any sum received by the unit holder, except income under certain specified sections1.
g. Income from Specified Mutual Funds to be Short-term Capital Gains
The Bill has proposed to tax income from Market Linked Debentures (MLD) by treating it as short-term capital gains.
It is now proposed that income from a ‘Specified Mutual Fund’ (i.e., a mutual fund where less than 35% of its total proceeds is invested in equity shares of domestic companies) shall also be treated as short-term capital gains.
For computing the percentage of equity shareholding of these specified funds, it shall be computed with reference to the annual average of daily closing figures.
h. Clarification on the applicability of Angel Tax Provisions
The Bill has proposed to withdraw the exemption available to a non-resident in respect of Angel Tax. It is now clarified that Funds regulated by SEBI will also have to include Funds regulated by International Financial Service Centre Authority (Fund Management) Regulations, 2022.
The formula for the calculation of the specified sum had been prescribed.
i. Extension of tax holiday to Offshore Banking Units (OBUs) in SEZ
OBUs in SEZ are entitled to a 50% deduction from the 6th to the 10th year after inception.
It is now proposed to enhance it to 100% from 50%, commencing from the fiscal year 2022-23.
j. Taxation of return of capital by Business Trust
Section 115UA (1) of the Act provides that any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust. It further states that the total income of a business trust subject to capital gains shall be charged to tax at the maximum marginal rate.
The Bill 2023 proposed to make this section inapplicable to income which is taxable under Section 56(2)(xii) of the IT Act.
It is now being proposed that where the income is taxable under Section 56(2)(xii) of the Act, the pass-through benefit will not be available.
k. Tonnage tax scheme extended to certain IFSC Units
It is now proposed to extend the tonnage tax scheme to any entity located in IFSC (which has claimed deduction under Section 80LA of the IT Act) provided that such application is made within three months from the date on which deduction claimed under Section 80LA of the IT Act ceases.
l. Tax withholding
Section 193 of the IT Act provides for tax withholding on interest income payable on securities. The exemption is available in respect of interest payable on any security issued by a company, where such security is in dematerialised form and is listed on a recognised stock exchange in India.
The Bill had proposed to bring interest payable on listed securities by a company to a resident under the purview of tax withholding.
It is now proposed to carve out interest payable to Business Trusts by SPVs.
Also, it is proposed to provide a tax withholding rate of 9% in respect of long-term bond/rupee-denominated bonds issued on or after 1 July 2023 and listed only on a recognised stock exchange located in IFSC.
2. Online Gaming
The Bill has proposed tax withholding in respect of winning from Online Gaming with effect from 1 July 2023. It is now proposed to make it effective from 1 April 2023. Further, it is also proposed that a higher tax withholding rate of 20% shall be applicable if Permanent Account Number (PAN) is not available with the deductor.
3. New Tax Regime for Resident Individual taxpayer
The Bill proposed an enhanced rebate of INR 25,000 under section 87A of the IT Act where the resident individual taxpayer has annual taxable income of up to INR 0.7 mn and is taxed under the new tax regime. It is now proposed to grant marginal relief where tax on income exceeding INR 0.7 mn is more than the excess income over INR 0.7 mn.
4. Royalty and Fees for Technical Services are to be taxed at 20%
It is now proposed to tax income from royalty and Fees for Technical Services of non-residents at 20%.
5. Tax Collection at Source capped at 20%
It is proposed to restrict tax collection at source to 20% if either:
- The taxpayer has not furnished a Permanent Account Number; or
- The taxpayer has not filed their tax return.
INDIRECT TAX RELATED
6. The effective date for the operationalisation of Indirect tax amendments
The Finance Bill, 2023 has been amended to specifically provide that sections 123 to 144B, proposing amendments in Customs and GST Laws, would be made effective from a date to be notified. Earlier, there was no specific mention as to the date from which these changes would be made effective.
7. Proposed amendments to Customs Act, 1962
a. Amendments concerning the manufacture and other operations carried out in Warehouse.
A new section 65A is proposed to be introduced in the Customs Act, 1962 to provide that IGST and Compensation Cess would be payable on imported goods deposited in the Customs warehouse for carrying out the manufacture and other operations (under section 65), as opposed to the current facility of complete exemption from all elements of customs duty. The new section 65A also prescribes various other conditions.
It is also proposed that this amendment will not apply to goods which have already been deposited or permitted to be removed for deposit in the Customs warehouses before section 65A comes into force. Further, the Government may exempt goods from the application of new section 65A, subject to conditions which may be prescribed.
Sections 65, 157 and 159 of the Customs Act, 1962 are also proposed to be amended to facilitate the above changes.
b. Amendment to Basic Customs Duty (BCD) rates.
BCD as per tariff on the following specified items is proposed to be increased by the insertion of the seventh schedule in the Finance Bill, 2023.
Amended Tariff Rate
X-ray generators and apparatus (non-portable)
Portable X-ray machine
Minor amendments in tariff heading/tariff rate are also prescribed on some other products.
8. Amendments proposed in Central Goods and Services Tax Act, 2017 (CGST Act)
a. Amendment in Section 23 of the CGST Act – persons not liable for registration.
The amendment originally proposed in section 23 of the CGST Act in Finance Bill 2023 as introduced is proposed to be modified to provide that only specifically notified persons will be exempted from obtaining registration, despite being required to obtain registration.
b. Amendment in Section 30 of the CGST Act – revocation of cancellation of registration.
In line with the recommendations made by the GST Council in its 49th meeting to extend the present time limit of 30 days to seek revocation of cancellation of registration to 90 days with further extensions permissible subject to approvals; section 30 of the CGST Act is proposed to be amended to empower Government to prescribe the period and conditions under which the application for revocation can be made. As the amended provision grants broad powers to the Government, it is likely that by using these powers, the amnesty scheme for revocation of cancellation of registrations in past due to non-filing of returns as recommended by the GST Council in its 49th meeting can also be introduced.
c. Amendment to Section 62 of the CGST Act – deemed withdrawal of best judgment assessment order where return not filed.
Presently, the best judgment assessment order passed due to non-filing of returns is deemed to be withdrawn if the taxpayer files the return for the relevant period within 30 days of service of the best judgment assessment order. Following the recommendations of the 49th GST Council meeting, the time limit to file the return for deemed withdrawal of the best judgment assessment order is proposed to be extended from 30 days to 60 days and further extendable by another 60 days, subject to payment of additional late fees (and liability to pay interest and normal late fees remains).
d. Substitution/amendments to the law relating to GST Appellate Tribunal (GSTAT).
The Finance Bill proposes the substitution of sections 109, 110 and 114 of the CGST Act and to amend sections 117, 118 and 119 of the CGST Act, which deal with the set-up and operations of the GSTAT. The amendments appear to be the consequence of the adoption of the report of the Group of Ministers on the subject, with certain modifications, in the 49th GST Council meeting.
9. Amendments in the Integrated Goods and Services Tax Act, 2017 (IGST Act)
To give effect to the recommendations of the 49th meeting of the GST Council meeting, section 13(9) of the IGST Act is proposed to be omitted. Consequently, the Place of Supply of services of Transport of goods would be determined as per the default rule, i.e., the location of the service recipient, where the location of supplier or recipient is outside India.
10. Amendments to Goods and Services Tax (Compensation to States) Act, 2017 (Compensation Cess Act)
The Schedule to the Compensation Cess Act has been proposed to be amended to link the Compensation cess payable on Pan Masala from an ad valorem basis to a per cent of Retail Sale Price (RSP, as defined in the schedule) basis and on Tobacco and manufactured Tobacco substitutes, including tobacco products, the upper cap of Compensation cess is linked with their RSP.
Post the presentation of Finance Bill 2023, representations were made by the Professional bodies and associations seeking clarification on some of the tax proposals including requests for dilution of some of the provisions. The Government in line with the recommendations have further proposed some amendments in Finance Bill 2023, one may refer to it as Finance Bill 2023 (version 2) on the backdrop of the plethora of new tax provisions, relaxations and not to forget even new tax proposals. Most of the beneficial provisions and relaxations (except TCS on LRS) are reflecting the intentions of the Indian government to project IFSC Gift City as an alternative for foreign institutions especially post-SVB collapse.
Also, for the Business Trusts clarification was sought on the tax proposal of REITs/INVITs which were introduced in the Bill. It has now been clarified that there shall be no tax on the amortisation of SPV debt to the extent of the issue price. Tax parity of certain Debt Mutual Funds with the tax regime introduced for Market Linked Debentures is not what was expected by the industry and could have an impact on the growth of the Debt Markets.
Further, the increase in tax rate from 10% to 20% concerning income like Royalty and FTS in the hands of non-residents would have far-reaching consequences. This would have the following impact:
- the tax rates in some cases would go up
- and also lead to an increase in compliance wherever DTAA benefit would have to be claimed due to an increase in the tax rate under the IT Act.
The tax withholding on online gaming income is being made effective from fiscal year 1 April 2023 instead of 1 July 2023.
Further, the proposed amendments in GST are mostly to give effect to the recommendations of the 49th meeting of the GST Council. However, the amendments made in the Customs Act, concerning the withdrawal of IGST and Compensation Cess on goods brought into the bonded warehouse to carry out specified operations, need to be evaluated carefully by the industry to determine the impact. Businesses proposing to set up units under the MOOWR scheme may now need to reassess their plans.
1 Section 10(23FC) or 10(23FCA) or 56(2)(xii) or 115UA (2) of the IT Act