Budget 2021 – Changes in Income Tax Law

No change in rates of taxation

There are no changes in respect of income of all categories of assessee liable to tax for the financial year 2021-22. The rates of income shall continue to be the same as applicable for the financial year 2020-21. Similarly, the rates for advance tax, tax deduction at source or tax collection at source shall also remain the same.

Exemption for LTC cash scheme

Section 10(5) provides for exemption in respect of leave travel concession subject to the employee travelling to any place in India. However, following the travel restrictions due to COVID-19 pandemic, the Government notified the cash allowance scheme in lieu of leave travel concession. The cash allowance is now being exempted and the conditions for claiming exemption are as follows:

the option has to be exercised for the block of 2018-2021
spend the specified sum on goods or services with a GST rate of 12% or more
payment for such goods and services must be via electronic mode only
the expenditure must be made between October 12, 2020, to March 31, 2021
maximum exemption INR 36,000 per person (individual employee including his family members) or one-third of specified expenditure, whichever is less

The cash allowance scheme is applicable only for FY 2020-21.

Incentives for affordable rental housing

Under section 80-IBA developers of affordable housing projects are provided with a 100% tax exemption on business profits if the profits entirely relate to such projects. One of the conditions for exemption is that the project is approved by the competent authority between June 1, 2016, and before March 31, 2021. To help migrant labourers and to promote affordable rental, the deduction under section 80-IBA is being extended to additional projects to be notified by Central Government later. Further, the sunset date for exemption i.e. March 31, 2021, is also being extended to March 31, 2022.

Tax incentives for units located in GIFT City

Government has established world-class International Financial Services Centre (IFSC) where the units enjoy tax concessions. Gujarat International Finance Tec-City (GIFT City) is first of this kind. To make IFSC more attractive, and attract off-shore funds to set up their base in India, foreign funds who decide to shift their base to IFSC are being offered various tax incentives to provide corporate tax services, neutral status including exemption from capital gains on account of transfer of assets, exemption from tax on royalty on account of leasing aircraft, 100% exemption on any profits from the business of operating aircraft, and exemption from tax on any income arising on transfer of non-deliverable forward contracts entered into with an offshore banking unit in IFSC.

Tax neutral conversion of Urban Cooperative Bank into Banking Company

Section 44DB of Act provides for computing deductions in the case of business re-organization of co-operative banks, whereby the deductions under sections 32, 35D, 35DD and section 35DDA concerning depreciation and specified expenditures are also apportioned based on the number of days before conversion and after conversion between the original company and resultant company. The Reserve Bank of India (RBI) has permitted voluntary transition of a primary co-operative bank into a banking company by way of transfer of Assets and Liabilities. To make such conversions tax neutral, amendments have been made in section 44DB, whereby the transfer of a capital asset by the primary co-operative bank to the banking company as a result of conversion shall not be treated as transfer under section 47. Further, allotment of shares of the converted banking company to the shareholders of the primary co-operative bank shall also be not treated as transfer under section 47. Thus, there will be no capital gains on such conversions.

Facilitating strategic disinvestment of public sector company

Government has planned to strategically disinvest from public sector companies such as Life Insurance Corporation of India (LIC), Gas Authority of India Limited (GAIL), Oil and Natural Gas Corporation Limited (ONGC), Bharat Petroleum Corporation Limited (BPCL), Shipping Corporation of India (SCI) and a few other companies. To ensure such disinvestments have a tax neutral status, amendments have been made in section 2 and 72A to define demerger to include splitting of public sector companies into two and allow carry forward of losses and unabsorbed depreciation in case of amalgamation of public sector companies.

Extension of date of sanction of loan for affordable residential house property

Under section 80EEA, a deduction in respect of interest on loan taken for a residential house property from any financial institution up to one lakh fifty-thousand rupees is allowed where the stamp duty value of the residential house does not exceed INR 45 lakh, subject to the condition that the loan has been sanctioned during the period April 1, 2019, and March 31, 2021. This provision allows a deduction to the first time home buyers, in respect of interest on the home loan. The sunset date for such deduction has been extended to March 31, 2022, to allow more buyers to take the benefit.

Extension of date of incorporation for an eligible start-up for exemption and investment in eligible start-up

Under section 80-IAC, profits and gains by a Startup recognised by Department of Promotion of Industry and Internal Trade (DPIIT) are 100% exempt for a period of three consecutive financial years out of ten years, at the choice of the taxpayer, subject to total turnover not exceeding INR 100 crore. The sunset date for such exemption is being extended to companies incorporated before April 1, 2022, instead of April 1, 2021. Further, under section 54GB, capital gains from house property are exempted if proceeds are invested in an eligible startup which uses such funds to buy assets within one year. The sunset date for such exemption is being extended to March 31, 2022, instead of March 31, 2021.

Increase in safe harbour limit of 10% for home buyers and real estate developers selling such residential units

Under section 43CA where consideration from the transfer of land or building or both, is less than the stamp duty value, the stamp duty value shall deemed to be the full value of consideration. This does not apply if the stamp duty value is merely 10% more than the consideration received, known as ‘Safe harbour limit’.

To boost demand for home buyers and real estate developers, the safe harbour limit has been extended to 20%. Similarly, under section 56(2)(x) the difference between sale consideration and stamp duty value is taxed again if the stamp duty value exceeds the sale consideration by more than 10%. This limit is also amended accordingly to 20%.

These amendments shall only apply for the sale of properties between November 12, 2020, to June 30, 2021. Further, the value of sale consideration should not exceed INR 2 crore, to avail the safe harbour limit of 20%. In other cases, the safe harbour limit of 10% shall continue to apply.

Thus, when a person sales any property, the sale consideration must be more than 80% of the stamp duty value of such property to avoid paying additional taxes. If the sale consideration is 20% lower than the stamp duty, the entire difference between stamp duty value and sale consideration is taxed twice, as a penalty. The provisions of these sections were brought in to deter taxpayers from dealing in black money while selling property and instead disclose the full value of consideration for taxation.

Relaxation for a certain category of senior citizen from filing return of income-tax

To provide relief to senior citizens with the age of 75 years or above, a new section has been inserted to provide relaxation from filing income tax return subject to following conditions: 1) such person is resident 2) has only pension income or interest income from the same bank 3) the bank is specified bank (notification to be issued soon) 4) furnishes declaration to such bank. In such cases, the banks shall compute the tax payable after considering all deductions and rebate and deduct tax at the rates applicable for such individual for such year, if any tax is required to be deducted. This amendment is applicable from April 1, 2021.

Addressing mismatch in the taxation of income from a notified overseas retirement fund

In case of various taxpayers who are resident in India but were non-residents earlier, there is a mismatch in taxability of withdrawal from retirement funds. At present, the withdrawal from such funds is taxed on receipt basis in certain foreign countries, while on an accrual basis in India. To address this mismatch, a new section 89A has been inserted to provide that the income of a person resident in India having a retirement benefits account in notified countries where withdrawals from such account are taxed on receipt basis, shall be taxed on receipt basis (detailed notification to follow).

Rationalisation of provisions of Minimum Alternate Tax (MAT)

As per section 115JB Minimum Alternate Tax (MAT) shall apply at the rate of 15% of the book profit, if a tax on the total income of the company under income tax provisions is lesser than such minimum alternate tax. Book profits for this purpose are computed by making certain adjustments to the profit disclosed in the profit and loss account prepared by the company following the provisions of the Companies Act, 2013. However, such computation did not provide for adjustment on account of additional income of past years included in books on account of secondary adjustment of transfer price under section 92CE or on account of an Advance Pricing Agreement (APA) under section 92CC. Further, the computation of book profits also did not provide for the exclusion of dividend income which is now taxable in the hand of shareholders, as the dividend received by a foreign company on its investment in India must be to be excluded if the tax on such dividend income is less than MAT liability on account of concessional tax rate provided in the Double Taxation Avoidance Agreement (DTAA). Necessary amendments have been brought to section 115JB to provide for the exclusion of aforesaid incomes while computing book profits.

Exemption of deduction of tax at source on payment of Dividend to business trust in whose hand dividend is exempt

Section 194 of the Act provides for deduction of tax at source (TDS) by a company on payment of dividends to a resident at 10%. However, the provisions of this section do not apply to if the dividend is paid to insurance companies. This exemption is further extended to such income credited or paid to a business trust by a special purpose vehicle or such other persons as may be notified.

Rationalisation of the provision concerning withholding on payment made to Foreign Institutional Investors (FIIs)

Section 196D provides for deduction of tax on the income of FII from securities at the rate of 20%. Since the said section provides for TDS at a specific rate indicated therein, the deduction is to be made at that rate and the benefit of Double Taxation Avoidance Agreement under section 90 or section 90A cannot be given at the time of tax deduction. The situation is different in cases where the provision mandates TDS at the rate in force, as the definition of the expression ‘rate in force’ under section 2(37A) allows the benefit of DTAA in determining the TDS rates, also upheld by Supreme Court in PILCOM vs. CIT West Bengal. Thus, a proviso has been inserted to section 196D(1) to provide that a payee to whom DTAA applies and has furnished the tax residency certificate, the tax shall be deducted at the rate of 20% or rates of income tax provided in such agreement, whichever is lower.

Rationalisation of provisions relating to a tax audit in certain cases

Under section 44AB, businesses are required to get their accounts audited, if total sales turnover exceeds INR 1 crore during the financial year. Similarly, in case of a person carrying on profession, the limit is INR 50 lakh. To reduce the compliance burden on small and medium enterprises, the threshold limit for a person carrying on business was increased to INR 5 crore if the aggregate of all receipts and payments in cash during the previous year does not exceed 5% of total receipts or payments respectively. To incentivise non-cash transactions, the threshold has been further increased to INR 10 crore. This amendment will be applicable for FY 2020-21 onwards.

No interest under 234C for delayed payment of Advance tax instalments of certain incomes

Under section 234C, an assessee must pay interest if he fails to pay the advance tax instalments on time, simple interest at the rate of 1% per month for a period of three months on the amount of shortfall. However, due to the intrinsic nature of various income, it is not possible to accurately estimate the advance tax. Amendments have been brought to provide relaxation for the failure to pay the advance tax on time on account of the income listed as below where no interest under section 234C shall be charged if the assessee has paid full tax in subsequent advance tax instalments. These exclusions are 1) capital gains 2) winnings from the lottery, crossword puzzles, horse races, card games, etc 3) income under the head ‘Profits and gains of business or profession’ where the income accrues or arises for the first time, 4) dividend income

Exemption to universities, educational institutions and hospitals

Section 10(23C) provides for exemption of income received by different funds or institutions etc. specified in different sub-clauses. Sub-clause (iiiad) provides for the exemption for the income received by a university or educational institution and sub-clause (iiiae) provides for the exemption for the income received by a hospital or specified institutions. Presently, if the annual receipts do not exceed INR 1 crore, the same shall remain tax-exempt. To provide benefit to small trust and institutions, the threshold for exemption is now increased to INR 5 crore. This amendment will take effect from FY 2021-22 onwards.

Period for revising defective returns to be relaxed

In case of a defective return, the Assessing Officer intimates the defect to the taxpayer and gives him 15 days or more to rectify the defect. If the defect is not rectified within the said period, the return is treated as an invalid return and the assessee will be considered to have never filed a return. Considering the genuine hardship involved in the above provisions, power has been given to the Central Board of Direct Taxes (CBDT) to specify a class of taxpayers to whom relaxations would be provided. Detailed notification will follow soon.

Non-payment of employee contribution to fund before the due date, permanent disallowance

Section 43B specifies deductions that are admissible only upon their actual payment. Employer’s contribution to employee’s funds is covered in section 43B(b). According to it, if any sum towards employer’s contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is paid by the assessee on or before the due date for furnishing the return, the employer would be entitled to the deduction. This provision only covers employers’ contribution. However, in various judicial pronouncements benefit has been given to employers who have delayed in depositing employees’ contribution, however, have been allowed expenditure based on payment before filing the income tax return. Therefore, section 36(1)(va) whereby expense deduction is allowed for employees’ contribution, is now amended to insert explanation that provisions of section 43B shall not apply to employees’ contribution. Further, section 43B is also amended to provide a similar explanation. As a result of these amendments, any delay in depositing employees’ contribution to employees’ welfare fund shall now result in permanent disallowance, while a delay in depositing employers’ contribution will be allowed on payment basis.

Constitution of Dispute Resolution Committee for small and medium taxpayers

While pending disputes are being resolved or adjudicated, it is important that in future there is less number of disputes from fresh assessments. Hence, to provide early tax certainty to small and medium taxpayers, it is proposed to introduce a new scheme for preventing new disputes and settling the issue at the initial stage. Accordingly, the Central Government shall constitute a Dispute Resolution Committee (DRC). A certain class of assessees would be allowed to resort to DRC at their own choice. The DRC shall only consider cases, where total income is less than INR 50 lakh and variation in the assessment order, is less than INR 10 lakh. These provisions shall not apply if the order is based on search, seizure or survey, or if there is detention, persecution or conviction under other specified laws.

Constitution of the Board for Advance Ruling

The Authority for Advance Ruling (AAR) shall cease to operate with effect from such date as may be notified. Instead, one or more Board for Advance Ruling (BAR) shall be constituted consisting of two members not below the rank of Chief Commissioner. All advance rulings shall be handled by the board, and the same shall not be binding on the taxpayer or tax department and can be challenged in High Court. As per experience, the posts of Chairman and Vice-Chairman have remained vacant for a long time due to non-availability of eligible persons. This has seriously hampered the working of AAR since a ruling cannot be made in their absence and thus, a large number of applications are pending for last many years. Therefore, a new mechanism in the form BAR is being introduced to overcome these bottlenecks.

Possibility of double deductions for Charitable Trust and institutions while calculating application or accumulation eliminated

Corpus donations received by Charitable trusts and institutions are exempt from income tax. Any other income is not allowed to be accumulated, except for 15% which may be accumulated for 5 years. There are various instances where trusts or institutions claim the use of corpus donations as an application of their profits. Besides, there are also instances where such institutes take loans or borrowings and use the proceeds for expenses and claim these as an application of funds. Later, when the loan is repaid, the amount is again considered as an application of funds. This results in a double deduction. Clarifications have been added to section 10 and 11 to seal these loopholes. Any corpus donation will now have to be collected as per specific instructions and invested in the manner as may be specified by a notification to be issued soon.

Unit Linked Insurance Policy (ULIP) proceeds taxable if premium exceeds INR 2.5 lakh

Section 10(10D) exempts any sum received under a life insurance policy, including bonus sums on such policy where the premium payable does not exceed 10% of the sum assured. There is no cap on the amount of annual premium being paid and thus, High Networth Individuals (HNIs) also enjoy these exemptions. Amendment has been made by way of explanation to restrict such exemption to policies where the annual premium is less than INR 2.5 lakh. Further, Securities Transaction Tax (STT) shall apply to premature or partial withdrawal from such policies where exemption is not available.

Scope of Slump sale extended

Transactions of ‘sale’ are disguised as ‘exchange’ by the parties to a transaction, though such transactions are factually slump sales, to avoid slump sale taxation. Thereby, section 2(42C) has been amended to provide that all types of transfers under section 2(47) are included under slump sale whether sale or exchange or otherwise.

Transfer of capital asset to partners on dissolution or reconstitution

Section 45(4) provides that capital gains arising from the transfer of a capital asset by way of distribution on the dissolution of a firm or other association of persons as taxable at the hands of such firm or AOP and the market value of such asset on the date of transfer be considered as the consideration. Due to confusion on the application of current provisions, a new clause (4A) is being introduced to replace clause (4). The market value of the asset shall remain to be the consideration on transfer of the asset, while the capital balance of the partner in the books of account shall be considered as the cost of acquisition and capital gains accordingly calculated shall be taxable at the hands of such firm or AOP.

Provisional attachment in fake invoice cases

Section 271AAD imposes a penalty on any person who creates a false entry or omits an entry from his books of accounts. It is considered highly likely that the taxpayer may evade payment of any penalty if imposed. Thus, section 281B is now amended to allow provisional attachment any property of the assessee, if the penalty likely to be imposed exceeds INR 2 crore.

Rationalisation of the provisions of Equalisation Levy

Explanation to section 163 has been inserted to clarify that consideration received or receivable for specified services and consideration received or receivable for e-commerce supply or services shall not include consideration which is taxable as royalty or fees for technical services in India under section 90 or section 90A.

Explanation to section 164(cb) inserted to provide that for e-commerce supply or service, online sale of goods or provision of services shall 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.

Section 165A has been amended to provide that consideration received or receivable from e-commerce supply or services shall include: (a) consideration for the sale of goods irrespective of whether the e-commerce operator owns the goods and (b) consideration for the provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.

Depreciation on Goodwill and Capital Gains

Goodwill of a business or a profession is not specifically provided as an asset under income tax law. The question of whether goodwill of a business is an asset and whether depreciation on goodwill is allowable is an issue adjudged by Supreme Court in the case Smiff Securities Limited, where the court allowed such depreciation. However, Goodwill, in general, is not a depreciable asset and depending upon how the business runs, goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, necessary amendments have been brought to specifically provide that Goodwill of a business shall not be an asset and no depreciation would be allowed on the same. In a case where Goodwill is acquired, the cost of purchase shall be considered as the cost of acquisition, reduced by any amount of depreciation claimed before this amendment to calculate capital gains on transfers.

Presumptive taxation under section 44ADA not to apply to LLP

Section 33ADA(1) provides any resident assessee engaged in a profession under 44AA and total gross receipts do not exceed INR 50 lakh in any previous year, 50% of the gross receipts of the assessee shall be deemed to be the taxable profits. The section allows individuals, HUF and partnership firms to claim the benefit of presumptive taxation. Limited liability partnerships are required to maintain books of accounts as per LLP act. Therefore, an amendment has been made to clarify that 44ADA does not apply to LLP.

Income Declaration Scheme (IDS) amendment

The Income Declaration Scheme, 2016 provided an opportunity to the taxpayers to disclose any income in the past and make payment of tax, surcharge and penalty as per the provisions of the Scheme. Section 187 provides that if the declarant failed to pay such amount, the declaration filed by the declarant shall be deemed invalid. Meanwhile, section 191 provides that any amount of tax, surcharge and penalty paid in pursuance of a declaration made under the Scheme shall not be refundable. A proviso was inserted in section 191 to empower the Board to specify a class of persons to whom such tax paid in excess shall be refundable. Section 191 is now amended to provide that such excess amount being refunded shall be without payment of any interest.

Tax Deduction at Source (TDS) on purchase of goods

A new section 194Q has been inserted to provide for tax deduction at source on purchase of any goods, if such purchases exceed INR 50 lakh during the financial year, at the rate of 0.1%. This section shall apply only to taxpayers whose sales turnover exceeds INR 10 crore in immediately preceding financial year. This tax deduction under section 194Q shall not be applicable if the transaction is already liable to TDS under other provisions or liable to TCS under section 206C(1H). Further, where Permanent Account Number (PAN) is not furnished, such deduction shall be at the rate of 5%. These amendments are effective from July 1, 2021. Thus, all transactions between two parties where the amount exceeds INR 50 lakh in a financial year are now covered either by TDS or TCS. Since TDS and TCS have been a successful way of collecting taxes as compared to advance tax or other provisions, Government may increase these rates of TDS or TCS and also the scope of taxpayers covered in the future year, to ensure higher and steady tax collections, as TDS or TCS is to be deposited every month.

Taxability of Interest on various funds where income is exempt

Section 10(11) provides for tax exemption on any proceeds from specified funds such as Provident Fund, payable to any person. Section 10(12) provides for tax exemption on any proceeds from Recognised Provident Fund payable to an employee. High Networth Individuals (HNIs) also enjoy these exemptions by depositing huge sums. Accordingly, a proviso has been added to the aforesaid sections, to provide that the exemption shall not apply to interest income earned on contributions made more than INR 2,50,000 in any particular year on or after April 1, 2021. Whether it is the dividend on equity, interest income on deposits or proceeds from life insurance, the HNIs have to pay higher taxes.