No changes in personal tax rates, rebate, surcharge and 'health and education cess'.
The table summarizing the slab wise rates applicable to individuals is as under –
Exemption for LTC Cash Scheme
- Under the existing provisions of ITA, exemption is available for value of travel concession or assistance received by an employee from his employer/ former employer, for himself and his family, leave travel to any place in India ("Leave Travel Concession" or "LTC").
- Due to the Covid-19 situation, it is proposed to provide tax exemption to cash allowance in lieu of LTC.
- Accordingly, it is proposed to amend the ITA to provide tax exemption to cash allowance in lieu of Leave Travel Concession, subject to fulfilment of certain conditions, incurred during AY 2021-22 only.
- This is a welcome move for salaried taxpayers who may have been unable to utilise the LTC components of their compensation and received cash in lieu of the LTC.
Amendments in connection with Provident Fund
- Presently, payments from recognised provident funds, as well as accumulated balances due and becoming payable to an employee participating in a recognised provident fund (to the extent specified) are exempt from tax. Since various employees are contributing huge amounts to these funds, and entire interest accrued/received on such contributions is exempt from tax, a maximum contribution threshold is proposed.
- It is proposed that the tax exemption shall not apply to the interest income accrued during the FY, in the account of the person to the extent it relates to the amount or the aggregate of amounts of contribution made by the person exceeding INR 2,50,000 in a previous FY in that fund, on or after 01 April 2021.
- In case the threshold is exceeded, the tax on such income would be computed in such manner as may be prescribed.
- The amendments will take effect from 01 April 2022 and shall apply to AY 2022-23 and thereafter.
- The proposed amendment does away with the exempt-exempt-exempt status accorded to provident fund contributions at least for employees making large contributions. This is also clearly to reduce government burden since provident funds typically fetch higher interest.
Taxation of proceeds of Unit Linked Insurance Policy (ULIP)
- Currently, the ITA provides exemption for the sum received under a life insurance policy, including the sum allocated by way of bonus on such policy in respect of which the premium payable for any of the years during the terms of the policy does not exceed ten percent of the actual capital sum assured. Further, there is no cap on the amount of annual premium paid by any person during the term of the policy. High net worth individuals are claiming exemption by investing in ULIP with huge premium, which is contrary to legislative intent.
- It is proposed to amend the relevant provisions to cap the ULIP premium to INR 2,50,000 in a FY. The current exemptions available to ULIPs would not be available in case the cap is breached.
- Further, if premium is payable by a person for more than one ULIPs, issued post 01 February, 2021, exemption will be available only to policies having aggregate premium not exceeding INR 2,50,000 for any of the previous years during the term of any of the policy.
- Additionally, ULIPs to which the specific exemption does not apply would be treated as 'capital assets' and will be treated on par with 'equity-oriented fund', so as to provide same capital gains tax treatment as equity-oriented fund, upon sale/redemption of such ULIPs.
- These amendments will take effect from 01 April, 2021 and will accordingly apply from AY 2021-22 onwards.
- The proposed amendment is likely to make high value investments in ULIPs less attractive.
Extension of date of sanction of loan for affordable residential house property
- Under the current provisions of the ITA, a deduction is provided in respect of interest on loan taken by first time buyers, for a residential house property from any financial institution up to INR 1,50,000, subject to the loan having been sanctioned during the period 01 April, 2019 to 31 March, 2021.
- In order to help such first-time home buyers further, it is proposed to extend the outer date for sanction of loan from 31 March 2021 to 31 March 2022.
- This amendment will take effect from 01 April, 2022 and will accordingly apply to AY 2022-23 and subsequent AYs.
Relief from mismatch in taxation of income from notified overseas retirement funds
- Currently, there is a mismatch in year of taxability of withdrawal from retirement funds by resident Indians who had opened such funds while residing in foreign countries. The withdrawal from such funds is presently taxed on receipt basis in such foreign countries, but on accrual basis in India, causing hardship to taxpayers.
- In order to address mismatch in taxation of income from notified overseas retirement fund, incomes would be taxed according to specified manner which the Government will notify.
- The proposed taxation scheme will be applicable to individuals who are resident in India and have opened specified retirement fund accounts outside India, while being non-resident in India and resident in that country.
- This amendment will take effect from 01 April, 2022 and will apply from AY 2022-23 onwards.
Rationalising the tax regime for units in International Financial Services Centre
- Enabling provisions introduced to relax compliance
with conditions in Section 9A of the ITA
Currently, the ITA provides a safe harbour (from establishing a 'business connection') to offshore funds having onshore fund managers on fulfilling certain specified conditions.
In order to encourage offshore funds to have their fund management activity in India, it has been proposed to further amend the ITA. The proposed amendment provides that the fund managers who are located in IFSC and commence its operations on or before 31 March 2024 may or may not have to fulfil one or more conditions currently provided in the ITA, as to be notified by the Central Government, at a later date.
- Tax exemption extended to investment division of
offshore banking units located in IFSC
The ITA provides that capital gains arising on transfer of a capital asset, being bonds, GDRs, rupee denominated bonds or derivatives by Category-III Alternative Investment Fund (AIF) shall be exempt from income-tax to the extent such gains arise in respect of units in the AIF held by a non-resident.
It has been proposed to extend such exemption to investment divisions of offshore banking units located in IFSC provided such offshore banking unit which has been granted a category III AIF registration and fulfils other conditions to be prescribed including the condition of maintaining separate books for its investment division.
- Capital gain exemption from transfer of units of an
offshore fund to a unit located in IFSC
Proposed amendment introduces new clauses to provide exemption from capital gains arising in process of relocation by the original fund into IFSC.
An exemption has also been provided to shareholders and unitholders for any gains that may arise on account of exchange of units held in the original fund with units of the resultant funds.
'Original fund' has been defined to mean such a fund that is not a resident in India (i.e., offshore fund) and is a resident in a country with which India has a tax treaty and is subject to investors protection regulation and fulfils such other conditions as prescribed.
'Resultant fund' has been defined to mean a fund that is established in India and has received a certificate of registration as a Category I or Category II or Category III Alternative Investment Fund and located in an IFSC.
- Income received by a non-resident from aircraft
leasing from a unit located in IFSC
A new provision is proposed to be introduced in the ITA to provide tax exemption to non-residents who earn royalty on account of leasing of aircraft from a unit located in IFSC.
This amendment is proposed to come into effect from April 1, 2022 and accordingly, would apply in relation to AY 2022-23 and thereafter.
Clarifications to address the consequent impact of taxation of dividend in the hands of recipient
- Dividend, which is now taxable in the hands of the recipient, derived by a foreign company may be taxable in India at beneficial rates as per the tax treaties. Hence, it is proposed that such dividend be treated akin to royalty, fees for technical services and interest chargeable to tax at special rates under the ITA. Accordingly, dividend shall not be included in computation of book profit and any expenses incurred in earning such dividend shall be added back. This is proposed to be brought in effect from AY 2021-22.
- Business trusts are considered as pass-through entities under the ITA, i.e., income of the trust is taxed in the hands of the unit holders. It is proposed that dividend received by business trusts from special purpose vehicles shall not be subjected to tax deduction (TDS) under section 194 of the ITA. This amendment shall be effective from 01 April 2020.
- Dividend income is now taxable in the hands of the recipient. Accrual of dividend income cannot be determined unless declared by the company. Realizing this, it is proposed to amend section 234C of the ITA for calculation of interest on delayed payment of advance tax. With effect from AY 2021-22, where the shortfall in advance tax is on account of dividend, other than deemed dividend under section 2(22) of the ITA, no interest shall be calculated under section 234C if the tax on such dividend is paid in the subsequent instalments.
Rationalization of Minimum Alternate Tax ('MAT') provisions
- Section 115JB of ITA provides for payment of 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 ITA is less than 15% of book profit. Book profit is computed after making certain adjustments to the profits declared by the company as per its books of accounts. Currently, section 115JB does not provide for any adjustment on account of additional income of past year(s) included in books of account of current year on account of secondary adjustment or transfer pricing adjustment or on account of an Advance Pricing Agreement (APA) entered with the taxpayer.
- To address this anomaly, it is proposed that where previous year's income is included in the current year due to an APA or a secondary adjustment under transfer pricing, the taxpayer can make an application to the Assessing Officer (AO) requesting the recomputation of book profit under section 115JB of the past year(s).
- For this purpose, the period for passing a rectification order under section 154 shall be considered from the end of financial year ('FY') in which the said application is received by the AO.
Issuance of zero-coupon bond (ZCB) by infrastructure debt funds
- Currently, ZCB is defined under ITA as a bond issued by any infrastructure capital company, infrastructure capital fund, public sector company or scheduled bank and in respect of which no payment and benefit is received or receivable before maturity or redemption. Further, such ZCB are required to be notified by Central Government in official gazette.
- It is proposed to amend the definition of ZCB, to enable infrastructure debt fund (which are notified by the Central Government in the Official Gazette under Section 10(47)) to issue such bonds. This amendment will take effect from 01 April, 2022 and will accordingly apply from AY 2022-23 onwards.
Incentives for the real estate sector
- Section 80-IBA provides 100% deduction of profits from the business of building and developing affordable housing projects, subject to conditions like the project being approved by 31 March 2021. It is proposed to extend the date of getting approvals by one year, i.e., up to 31 March 2022.
- Further, it is proposed to extend the benefit of this deduction to rental housing project notified by the Central Government in the Official Gazette.
- In the case of sale of immovable property (other than a capital asset), section 43CA provides that the sale consideration shall be replaced by the Stamp Duty Valuation (SDV) if the SDV exceeds 110% of the consideration. Likewise, under section 56(2)(x), where a taxpayer receives an immovable property for a nil or inadequate consideration, SDV shall be considered as his Income from Other Sources, provided SDV exceeds Rs. 50,000 or 110% of the consideration.
- This safe harbour limit is now proposed to be increased to from 10% to 20%, subject to the following conditions:
- Transfer of residential unit takes place during the period from 12th November, 2020 to 30th June, 2021;
- Transfer is by way of first-time allotment of the residential unit to any person;
- Consideration received or accruing on such transfer does not exceed INR 2 crores.
- Section 44ADA of ITA provides for computation of profits at 50% of the of the gross receipts for a resident taxpayer being an individual, HUF or a firm, where the gross receipts do not exceed INR 50 lakhs during the FY.
- Since the definition of 'firm' under section 2(23) of ITA provides that firm shall include a limited liability partnership (LLP) as defined in the Limited Liability Partnership Act, 2008, a confusion arises whether LLPs covered under section 44ADA need not maintain books of accounts.
- However, since LLPs are required to maintain books under LLP Act, it is clarified by that LLPs are not eligible for benefit under section 44ADA.
Rationalisation of provisions related to Sovereign Wealth Fund (SWF) and Pension Fund (PF)
Income of a foreign SWF and PF from investments in India is exempt under section 10(23FE) on satisfaction of certain conditions. From AY 2021-22, certain relaxations are proposed to encourage investments by such funds in India. They are:
- Allowing the investee being an Alternate Investment Fund (AIF) to invest up to 50% in non-eligible investments.
- Allowing investments in AIF having 50% investment in eligible infrastructure company or in an Infrastructure Investment Trust (InvIT).
- Allowing investment through a holding company, being a domestic company set up after 01 April 2021 and having minimum 75% investments in one or more infrastructure companies.
- Allowing investment in NBFC- IDF/IFC (nonbanking finance company-infrastructure debt fund/ Infrastructure finance company)
- Entitlement to this exemption even though the SWF / PF enjoys similar exemption in its home country.
Amendment to Equalisation Levy provisions
- The Finance Act, 2016 introduced Equalisation Levy (EL) with a view to tax digital transactions. EL is levied at 2% of the amount of consideration received or receivable by an e-commerce operator from ecommerce supply or services made or provided or facilitated, by it-(i) to a person resident in India or (ii) to a non-resident in the specified circumstances or (iii) to a person who buys such goods or services or both, using internet protocol address located in India.
- It is proposed to clarify that any income which is subject to levy of EL shall be considered as exempt under ITA from the time of introduction of EL.
- It also clarifies that consideration from e-commerce supply or services shall not include the amount taxable as royalty or fees for technical services in India ITA read with the applicable tax treaties. Thus, royalties and fees for technical services of a foreign resident shall continue to be taxed under ITA or as per tax treaties, whichever is more beneficial.
- It is also proposed to widen the scope of activities covered under EL by defining certain important terms like online sale of goods and online provision of services and consideration received or receivable from e-commerce supply or services.
- It is proposed that for the purposes of defining e-commerce supply or service, online sale of goods and online provision of services‖ shall include one or more of the following activities taking place online:
- Acceptance of offer for sale;
- Placing the purchase order;
- Acceptance of the purchase order;
- Payment of consideration; or
- Supply of goods or provision of services, partly or wholly.
- Further, consideration received or receivable from e-commerce supply or services is proposed to include consideration for sale of goods and provision of services irrespective of whether the e-commerce operator owns the goods and irrespective of whether service is provided or facilitated by the e-commerce operator.
Definitions of 'liable to tax'
- Often taxpayers take benefit of tax treaties in a manner which is detrimental to the interest of the Revenue and results in tax loss for the exchequer. One such example is the controversy related to 'liable to tax' and 'subject to tax'. Non-residents often have businesses in countries like UAE where their income is not taxed or not 'subject to tax'. Such businesses are controlled from India, but they escape taxation in India since the term 'liable to tax' is not defined under ITA.
- The Finance Act, 2020 plugged this loophole by introducing section 6(1A) in ITA. This section is a deeming fiction whereby an Indian citizen, who is otherwise a non-resident in India, is deemed to be a resident in India if his total income from Indian sources exceeds INR 15 lakhs and he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. However, the term 'liable to tax' was not defined.
- It is now proposed to define the term 'liable to tax', in relation to a person, to mean that there is a liability of tax on that person under the law of any country and will include a case where subsequent to imposition of such tax liability, an exemption has been provided.
- Accordingly, income of Indian citizens would be taxed under section 6(1A) even if they are exempted from tax in the source country.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.