Key Provision Amendment of Taxation in Finance Bill 2021

Tax payers can take a sigh of relief as no changes / increase has been proposed in the tax rates in spite of the need to have more funds in the challenging times.

Relief to certain category of senior citizens from return filing requirement

 In order to provide relief to resident senior citizens (aged of 75 year or above) having only pension and interest income accruing to them, an exemption has been proposed from filing the return of income. However, a declaration will have to be filed with specified bank in this regard and bank would be required to compute the income after giving effect to applicable deductions/ rebates and deduct income tax at rates in force.

Liable to tax defined - Section 2(29A)

It is proposed to insert a new clause (29A) to section 2 so as to define the expression “liable to tax”, in relation to a person, which means that there is a liability of tax on such person under any law for the time being in force in any country, and shall include a case where subsequent to imposition of tax liability, an exemption has been provided.

The amendment is in line with judicial pronouncements wherein it has been held that liable to tax does not necessarily imply that taxes are paid in the other contracting state, it is sufficient that contracting state has right to levy taxes. The concept is also relevant to determine if an individual is deemed to be resident under section 6.

Section 10(5)

Considering outbreak of Covid, 19 and travelling possibilities being hindered, Section 10(5) is proposed to be amended to provide tax exemption of cash allowance in the hands of individuals, if any value or assistance is received by or due to such individual in lieu of any travel concession subject to fulfilment of conditions as may be prescribed.

Proposed amendment to be made effective from AY 2021-22 

Section 10(11) and 10(12) 

Payment from provident fund is exempt under Section 10(11) and receipt of accumulated balances from employee recognised provident fund is exempt under section 10(12). It is proposed to provide that such exemption shall not apply to interest income accrued to the extent it relates to the amount or aggregate of the amounts of contribution to such funds made on or after 01st April 2021 in excess of Rs. 2.5 lakhs in the previous year. This amendment would affect taxpayers contributing huge sum to these funds as exemption would be denied to the extent of interest income on the excess sum contributed.

Relief with respect to income from overseas retirement funds

New section 89A is proposed to be inserted to address mismatch in taxation of income from specified overseas retirement accounts maintained by specified person in a notified country. Specified person is a person resident in India who has opened a retirement benefit account in a notified country while being a non-resident in India and a resident in that country. Said income shall be taxed in such manner and in such year as may be prescribed.

It is proposed to shift the taxation of such retirement benefit from accrual basis to receipt basis in India. The aforesaid relief will mainly benefit the NRIs returning to India.

Proceeds from Unit Linked Insurance Plan (Ulip) Section 10(10D)

Any proceeds received under ULIP issued on or after 01st February 2021 shall not be eligible for exemption if annual premium exceeds Rs. 2.5 Lakhs.

Such ULIP shall be treated as capital asset (equity oriented unit) and proceeds shall be taxable as capital gains. Rules for computation of capital gains shall be prescribed.

This amendment intends to put a cap on the total premium paid under ULIPs majority affecting High Net Worth Individuals.

Amendment to section 36(1)(va) and 43B

There have been numerous judicial pronouncements in favour and against taxpayer, on the issue whether contribution toward employee’s provident fund made by an employer after the due date prescribed under labour welfare laws but before the due date of the filing return of income shall be allowed as deduction or not? To address this, it is proposed to insert explanation in section 36(1)(va) and section 43B to clarify that provisions of 43B shall not apply to employees contribution to welfare funds accordingly, deduction shall be allowed under section 36 only if the deposit is made within the due dates prescribed under the relevant labour laws. This will now ensure stricter compliance adherence in the hands of taxpayers.

Depreciation on Goodwill

1. The long-drawn dispute of whether depreciation can be claimed on goodwill for the purpose of business and profession has been put to rest by the amendments proposed, by specifically carving out goodwill on business and profession as a depreciable asset for income tax purposes.
2.  It is further proposed to prescribe a specific computation mechanism to determine the written down value and short-term capital gains in case where depreciation on goodwill has already been claimed by the assessee.

This amendment clamps down on depreciation on goodwill which was being claimed by the corporate taxpayers all along relying on the Apex court judgement. It would impact depreciation even on concluded transactions.

Increase in the safe harbour limit under section 43CA and 56

It is proposed to increase the safe harbour limit under section 43CA from 10% to 20% in case of transfer of residential unit subject to following conditions :

• Transfer takes place between 12th November 2020 to 30th June 2021
• Transfer is by way of first time allotment to any person
• Consideration does not exceed Rs. 2 crore

Consequential relief is proposed to be provided under section 56(2)(x) for buyer of the property by increasing the safe harbour from 10 % to 20%.

These amendments would benefit real estate developers and give fillip to real estate sector.

Increase in the threshold for tax audit under section 44AB

It is proposed to increase the threshold limit for tax audit to 10 crores from existing 5 crores to incentivise digital transaction and reduce compliance burden, provided that (i) aggregate amount received for sales/turnover in cash and (ii) aggregate payment (expenditure) in cash does not exceed 5% of said respective amounts. Amendment is effective from AY 2021-22.

Section 44ADA – Presumptive taxation for professionals –

Provisions of presumptive taxation is not applicable to LLP since LLPs are required to maintain books of accounts under LLP Act and benefit of non maintenance of books of accounts under 44ADA cannot be availed. It is proposed to explicitly mention non applicability of section 44ADA to LLPs.

Expanding the scope of slump sale

It is proposed to expand the scope of ‘slump sale’ to include transfer of “undertaking, by any means,” thereby including all types of transfers within the ambit of ‘slump sale’. It is pertinent to note that this amendment would overturn the Bombay High Court judgement in the case of Bharat Bijlee wherein taxability of slump exchange was denied in absence of monetary consideration (in this case consideration was in nature of shares). In substance, transfer in the form of exchange shall also be covered under slump sale (provided other conditions are satisfied).

Section 142

It is proposed to empower prescribed income tax authority to issues notices under section 142 (1) besides assessing officer. This is in line with policy on faceless assessment to enable centralised issuance of notices. 

Revamping of reassessment proceedings

Unlike the erstwhile reassessment provisions where emphasis was on “reasons to believe” , substituted provisions focus on “information with the Assessing officer” i.e., information flagged in accordance with the risk management strategy formulated by the Board from time to time (or) any objection raised by C&AG. It may be noted that considering ‘flagged information based on risk management strategy’ as an ‘information’ so as to warrant assumption of jurisdiction under section 147/148 in all cases shall tantamount to giving unfettered powers to the assessing authorities for reopening assessment.

Section 148A has been inserted to provide that before issuance of notice under Section 148, the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering reply, the Assessing Officer shall decide, by passing an order, whether it is a fit case for issue of notice under Section 148. Giving opportunity of being heard before initiating reassessment proceedings is a welcome step.

Further, it is proposed to subsume provisions of section 153A/153C of the block assessments in the newly substituted section 148.

Faceless ITAT

With an aim to reduce human interface and cost of compliance it is proposed to introduce faceless proceedings before the ITAT. While creating a faceless ITAT is pathbreaking being one more step towards digitisation,its implementation and practical challenges should be closely examined.

MAT provisions :

115JB is proposed to be amended to provide that dividend income earned by foreign companies shall be reduced from the book profit and related expenditure added back where such income is taxed at lower that MAT rate due to DTAA 

Further, where past year income is included in books of accounts, on account of Advance Pricing Agreement or secondary adjustment, Assessing Officer shall on application made to him recompute the book profits of past years.

Section 10(50)

Equalisation Levy was introduced by India in 2016, on the lines of the recommendations of the OECD BEPS Action Plan aiming to tax revenues generated by ecommerce supply or services made which would not fall under the tax net applying the conventional tax norms.

E-commerce supply or services is defined to mean “online sale of goods” and “online provision of services”. Definition of term “online sale of goods” and “online provision of services” is now expended to include one or more of the following activities taking place online:

(a) Acceptance of offer for sale;

(b) Placing the purchase order;

(c) Acceptance of the Purchase order;

(d) Payment of consideration; or

(e) Supply of goods or provision of services, partly or wholly

Further, it is clarified that Equalisation levy is applicable on e-commerce supply or services irrespective of whether the e-commerce operator owns the goods or provides /facilitates the services.

Income from any specified service on which equalisation levy is applicable shall be exempt as per section 10(50).

Explanation 1 is proposed to be inserted to clarify that the income referred to in this clause shall not include and shall be deemed to have never included income which is chargeable to tax as royalty or Fee for technical service in India under the Income tax Act or DTAA.

Miscellaneous Provision

1. It is proposed to widen the ambit of provisional attachment u/s. 281B during pendency of any proceeding for imposition of penalty under section 271AAD (penalty for false entry or omission of entry in books of accounts) where the amount or aggregate amount of penalty likely to be imposed exceeds Rs. 2 Crores.
2. It is proposed to enable infrastructure debt fund to issue zero coupon bond under section 10(48). Further, TDS under section 194A shall not be applicable on paid or payable by infrastructure debt fund
3. To settle long pending disputes and to reduce litigation, dispute resolution is proposed for small taxpayers through constitution of a Dispute Resolution Committee. Taxpayers with taxable income up to ` 50 lakh and disputed income up to Rs. 10 lakh shall be eligible to approach the Committee.
4. Section 44DB is proposed to be amended to extend the benefit of various deductions to a case where a primary co-operative bank is converted to a banking company. Section 47 is also proposed to be amended to include transfer of capital asset by a primary co-operative bank to a banking company within its scope. Accordingly, such transaction shall not be treated as a transfer.
5. Section 72A is proposed to be amended with a view to facilitate strategic divestment by the Government to enable set off and carry forward of loss and allowance of depreciation of amalgamating company to amalgamated company in case of amalgamation of one or more public sector company/companies with another public sector company/companies.
6. 6. No interest under section 234C is proposed to be charged on shortfall in payment of advance tax on dividend income (except deemed dividend) provided full tax thereon is paid in subsequent instalments 
7. Section 115AD is proposed to be made applicable to investment division of an offshore banking unit to the extend income is attributable to investment division as Category III portfolio investor under SEBI (FPI) Regulations, 2019
8. Income tax Settlement Commission is abolished with effect from 1 February 2021.

Conclusion

In this unprecedented time government is walking tightrope aiming to revive the economy with various benefits, tax incentives and measures as announced in this budget.

The Finance Minister rightly remarked in her speech “‘Faith is the bird that feels the light and sings when the dawn is still dark’’. With these measures, the economy will certainly come out of present problems to reflect its true potential sooner than later.