New option to file ‘Updated Return’ after paying 25 – 50% additional taxes
Under new section 140B, for filing an updated return, a taxpayer has to mandatorily disclose additional income that has to mandatorily result in additional taxes. You cannot file a loss return, or decrease your income, the income must mandatorily increase as a result of the return. Further, on such incremental income, 25% additional tax has to be paid apart from the tax as per normal provisions i.e. tax slabs or 25% – 30% as may be applicable. If a taxpayer has not filed any return, or any belated return, and is now filing an updated return, additional tax has to be paid at 50% of the total tax payable, on the income disclosed in the updated return. Thus, taxpayers would effectively pay around 50% – 80% of the income in taxes, additional taxes and interest on such taxes. Therefore, though Finance Minister may call it a “trust-based” approach, it is effectively a useful provision for the income tax officers to avoid litigations and collect taxes quickly. It is quite unlikely that people would voluntarily file such a return unless forced to file by way of a tax notice.
Reduced alternate minimum tax rate and surcharge for Cooperatives
Currently, cooperative societies are required to pay Alternate Minimum Tax (AMT) at the rate of 18.5%. However, companies pay the same at the rate of 15%. To provide a level playing field between co-operative societies and companies, the rate of AMT has been reduced to 15% for co-operative societies. Further, the surcharge on the income of co-operative societies is also reduced from 12% to 7% for those having income of more than INR 1 crore and up to INR 10 crores. These amendments are applicable from FY 2023 onwards.
New surcharge at 12% on transfer pricing, buyback, dividend distribution
The surcharge has been increased to 12% in cases where tax has to be paid under section 92CE(2A) relating to transfer pricing or section 115QA which relates to buyback of shares by a domestic company; on dividend distribution tax at 20% under section 115TA Tax on distributed income to investors or Section 115TD tax on accreted income.
Litigations when an identical question of law is pending before a court
Section 158AA provides when an assessee has received a favourable decision in a question of law and the income tax department has filed an appeal to the court, the Commissioner or Principal Commissioner may direct the assessing officer to file appeals to the tribunal in other similar cases of the assessee in the different assessment year, only when the decision on the earlier case becomes final and is accepted by the assessee, to reduce time in litigation. On same principles, a new section 158AB has been introduced to provide that where the collegium (of two or more Chief Commissioners or Principal Commissioners or Commissioners of Income-tax) is an opinion that a similar case of the question of law is pending in case of any other assessee, they may defer the appeal in his case, subject to the decision on the earlier case. Earlier, these provisions only allowed deferment where the case pertained to the same assessees. Now, the same can be of different assessees as well. Thus, while it saves time and litigation cost for the department, the taxpayers will have to wait for a longer period before receiving final decisions, as the appeal by the department may be deferred subject to the decision in case of other taxpayers, by the high court or supreme court. Since this new section already covers the cases covered by section 158AA, the latter now has a sunset clause and will not be used for new orders effective from FY 2022 onwards.
Giving effect to orders of the Dispute resolution committee
A new section 144C has been added to allow the assessing officer to give effect to the orders of the dispute resolution committee passed under section 245MA. The option of DRC was introduced in Budget 2021.
Clarification regarding the treatment of cess and surcharge (Retrospective amendment)
Section 40 specifies amounts that are not allowed as deductions while computing business income. The said section disallows income tax paid from being claimed as deductible expenses against business income. However, many assessees have litigated in the past that the said section does not mention cess or surcharge and therefore, the same are tax-deductible expenses. This view has been upheld by courts in a few judgements. The Finance Minister has clarified that the same is not the intent of the law and therefore, to override all such judgements, diverging views and pending cases, the section has been amended retrospectively from April 1, 2005, to specify tax to include surcharge or cess.
According to section 14A deductions are not allowed if expenditure incurred by the assessee is concerning exempt income. However, in various tax disputes, it has been contended that expenditure (concerning exempt income) incurred in years where exempt income is not earned, should be allowed as tax-deductible expenses. For example, expenditure of INR 1,00,000 may have been incurred in FY 2022 to earn exempt income, however, such exempt income may be earned and become taxable in FY 2023 only. In such cases, many taxpayers have claimed the expenses incurred in FY 2022 as tax-deductible expenses since there is no exempt income in such a year. To clarify the intent of the law, an explanation has been added to section 14A, to remove this anomaly and will be effective from FY 2022 onwards.
Gift, travel facility, hospitality, cash or monetary grant in the pharmaceutical sector
Under section 37, any expenditure concerning an offence prohibited by law cannot be claimed as a tax-deductible expenditure. As per Indian Medical Council’s directions, medical professionals are prohibited from accepting any Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector industries. Thereby, when a pharma company incurs such expenses, the same would be prohibited by law and disallowed expenses. However, the same has been litigated several times and there are diverging views on the same. To clarify the intent of the law, necessary amendments have been made in section 37, effective from FY 2022 onwards.
Deduction of interest under section 43B
Section 43B provides that deductions for any interest payable on loan or borrowing from a specified financial institution/ NBFC/ scheduled bank or a co-operative bank shall be allowed only if such interest has been paid. Any interest converted into a loan or borrowing or advance is not to be deemed to have been paid, as per explanations to section 43B. However, many companies have claimed deductions for such interest by converting interest into debentures and even courts have upheld their decisions. To clarify the intent of the law, necessary amendments have been made and the same shall be applicable effective from FY 2023 onwards.
Interest on late deposit of TDS/TCS
To avoid litigations concerning interest on late deposit of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) since diverging views and court decisions exist, amendments have been made in section 201(1A) and 206C(7) to provide that interest on late deposit of TDS / TCS shall be payable as mentioned in an order made by the assessing officer. Thus, the order of assessing officers will be final concerning the amount of interest and the manner of computation of interest. This is effective from FY 2022.
Section 115BAB last date for commencement of manufacturing or production extended
Section 115BAB provides a concessional rate of taxation at 15% for new domestic manufacturing companies if they do not avail of any specified incentives or deductions. Such new companies are required to be set up and registered on or after October 1, 2019, and must commence manufacturing or production of any article or thing on or before March 31, 2023. The section was introduced to attract investment, create jobs and trigger overall economic growth. Since the pandemic has slowed down the efforts of many enterprises looking forward to the concession under this section, the last date for commencement of an article or thing has been extended by a year to March 31, 2024.
Date of incorporation for eligible startups for the tax holiday, extended
Under section 80-IAC startups registered after April 1, 2016, who obtain a certificate of eligible business from the Inter-Ministerial Board of Certification and has a total turnover of less than INR 100 crore are eligible for 3 year tax holiday in any of the ten assessment years from the year of incorporation. This was applicable only if the startup was incorporated before March 31, 2022. However, the last date is now extended by a year to March 31, 2023, for more startups to avail benefits under this scheme.
Tax incentives to IFSC
To further promote the International Financial Services Centre (IFSC), the income of a non-resident from offshore derivative instruments or over the counter derivatives issued by an offshore banking unit, income from royalty and interest on account of lease of ship and income received from portfolio management services in IFSC are now exempt from tax subject to certain conditions. Section 10(4E), (4F), and (4G), Section 56(viib) explanation, and section 80LA(2)(d) have been amended for this purpose. This will be effective from FY 2023 onwards.
Parity between NPS taxation of State and Central government employees (Retrospective amendment)
The Central Government contributes 14% of the salary to the National Pension System (NPS) Tier-I which is an eligible deduction for computing the income of the employee. However, in the case of State Government employees, such deduction is restricted to 10%. To provide equal treatment to both Central and State government employees, the tax deduction limit has been increased from 10% to 14% on employer’s contribution to the NPS account of State Government employees as well. This would enhance the social security benefits of the state government employees and bring them at par with central government employees, for NPS contribution. Thereby, in section 80CCD, for the words ‘Central Government’ wherever they occur, the words ‘Central Government or the State Government’ have been substituted. This amendment is applicable retrospectively from FY 2020 onwards.
Tax relief for persons with disability
Parent, HUF or guardian of a specially-abled person are allowed to take tax benefit of insurance for such person, however, the same is currently allowed only if lump-sum payment or annuity is available to the differently-abled person on the death of the parent or guardian. Sometimes, the specially-abled dependant may need annuity or lump sum amount during the lifetime of their parents and guardians and thus, income tax law has been amended to allow the payment of annuity and lump sum amount to the differently-abled dependent during the lifetime of parents and guardians on attaining the age of sixty years. This shall be effective from FY 2023 onwards.
Compensation for COVID-19 is tax-exempt (Retrospective amendment)
Proviso to section 56(2)(x) has been amended to provide that any sum of money received by an individual, from any person, in respect of any expenditure incurred by him on his medical treatment or of any family member, for any illness related to COVID-19 as exempt from taxation. Further, section 17(2) has been amended to provide that any such amount received from employers will not be treated as ‘Perquisite’. Proviso to section 56(2)(x) has been further amended to also provide that any amount received on account of the death of a family member from COVID-19 or related illnesses, such amount shall be exempt if it does not exceed INR 10 lakh. It is important to note that if the amount exceeds INR 10 lakh entire amount would be taxable. However, there is no maximum limit in case the amount is received from the employer of the deceased person. There will be other conditions for claiming exemption which will be notified by the central government. These amendments will take effect retrospectively from FY 2020 onwards.
Carry forward of losses in case of disinvestment of public sector enterprises
To facilitate the disinvestment of public sector companies, section 79 has been amended to provide that section 79(1) shall not apply to a public sector company if the ultimate holding company of such public sector company, immediately after the completion of strategic disinvestment, continues to hold, directly or through its subsidiaries, 51% of the voting power, in aggregate. This shall be effective from FY 2022 onwards.
TDS under section 206AB and 206CCA
In the previous budget, a new provision to deduct TDS was introduced, from payments to any person who has not filed an income tax return for the past two years, immediately preceding the current financial year, for which the due date for filing return under section 139(1) ‘Original return’ has expired. The TDS/TCS of such person must exceed INR 50,000 in each such two years for these provisions to apply. These provisions are not applicable when TDS is required to be deducted under sections 192, 192A, 194B, 194BB, 194LBC or 194N. These provisions are now amended to change the period of two preceding years to one preceding year. Further, individuals and Hindu undivided families (HUF) are not required to deduct TDS on such persons if covered by sections 194-IA, 194-IB and 194M. These amendments will be effective from FY 2023 onwards.
TDS on sale of immovable property
Section 194-IA relating to payment on transfer of certain immovable properties other than agricultural land has been amended to provide for deduction of tax at the rate of 1% of the consideration or the stamp duty value of such property, whichever is higher. Earlier the provisions only specified the consideration as the value to deduct TDS. This anomaly resulted in wrong reporting of taxable value and thus, has been removed. This section is applicable only where the value of the property transferred exceeds INR 50,00,000. The new amendment will be effective from FY 2023 onwards.
TDS on perquisite in respect of business or profession under section 194R
Many companies often transfer benefits arising out of sale or service directly to their agents. Thus, such benefits are neither reported to the income tax department nor the agent discloses such benefits in his income tax return. Therefore, section 194R has been inserted to provide that any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or profession, should ensure that tax has been deducted in respect of such benefit or perquisite at the rate of 10% of the value of such benefit or perquisite. The deduction is not required if the value of benefits do not exceed INR 20,000. This new section will be effective from FY 2023 onwards. The provisions shall not be applicable in the case of individuals or HUF with turnover less than 1 Crore in case of business and 50 lakh in case of the profession.
Taxation of Virtual Digital Assets (Cryptocurrencies, NFTs, etc.)
Section 115BBH seeks to provide that where total income includes any income from transfer of any virtual digital asset (i.e. ‘Cryptocurrencies’ as popularly known, and ‘Cryptoassets’ as Government calls them, and also Non-fungible tokens, or any other new concept that may be considered a digital virtual asset), the income tax payable shall be calculated at the rate of 30%. Deductions cannot be claimed against such income except the cost of acquisition of such assets. Any loss that arises from these transactions cannot be set off against any other income. Further, such losses cannot be carried forward to subsequent years. Thus, the tax on virtual digital assets is a classic ‘Partners in Profit only’ case where if you make profits, the income tax department is a 30% profit partner, however, if you make losses that’s all yours! Further, even if a taxpayer gifts such virtual digital assets, the same shall be liable to tax in the hands of the recipient. These amendments will be applicable from FY 2023 onwards.
To ensure that the transaction details are reported, TDS under section 194S has been introduced. As per section 194S, any payment made to transfer of virtual digital asset shall be liable to TDS at the rate of 1% of such consideration. Thus, the cryptocurrency exchanges or the NFT providers are now liable to deduct TDS at 1% on the sale amount. This will ensure that the traders or investors in such digital assets pay taxes to the government. TDS is required to be deducted even if the consideration is in kind e.g. exchange of one NFT against another, TDS is to be deducted at 1% on the value of NFT given. The provisions of section 203A and 206AB are not applicable in this case. TDS is not required to be deducted if the total annual consideration to a resident does not exceed INR 50,000 and INR 10,000 to any other person. Section 194S also overrides section 194O. These amendments are applicable from July 1, 2022, onwards.
Withdrawal of concessional rate of tax on dividend income under section 115BBD
Section 115BBD of the Act provides for a concessional rate of tax of 15 % on the dividend income received by an Indian company from a foreign company in which the said Indian company holds 26 % or more equity shares. To provide parity in the tax treatment in the case of dividends received by Indian companies from domestic companies, section 115BBD shall not be applicable from FY 2023 onwards. Thus, all kinds of dividends whether received from foreign companies or domestic companies would be taxable at the same rate, in the hands of an Indian company.
Section 248 provides that in a case where, under an agreement or other arrangement, a person who has deducted tax on any income paid to a non-resident under section 195, can file an appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income. However, to obtain a refund of the tax deducted and paid by a person where it was not deductible as per section 248, the taxpayer has no recourse to approach the Assessing Officer. Therefore, a new section 239A has been introduced to allow such an application for refund to Assessing Officer. This is applicable from FY 2023 onwards.
Source of income for unexplained Cash Credits
Section 68 provides that any sum credited in the books for which assessee does not explain the nature and source thereof or the explanation offered is not satisfactory, the sum so credited can be charged as income. Share capital, share premium, share application money, unsecured loans, etc are covered by these provisions where the onus of satisfactorily explaining such credits is on the receiver of such sums. Such unexplained cash credits are taxable at the rate of 60% along with a 25% surcharge, 6% penalty and interest as applicable. Many courts have held that proving the identity and creditworthiness of the creditor, along with the genuineness of the transactions is a sufficient explanation. However, section 68 has been amended to provide that the nature and source of such sum shall be considered as explained, only if the source of funds in the hands of the creditor is also explained. This would not apply if the creditor is a well-regulated entity i.e. Venture Capital Fund, Venture Capital Company registered with Securities Exchange Board of India (SEBI). The amendment is applicable prospectively from FY 2023 onwards.
Set-off of losses against undisclosed income
According to the income tax department, assessee claim set-off of losses or unabsorbed depreciation, against undisclosed income corresponding to the difference in stock, undervaluation of stock, unaccounted cash payment etc. detected during search or survey proceedings. Allowing the adjustment of undisclosed income against the loss or unabsorbed depreciation is resulting in a short levy of tax. Undisclosed income detected under sections 68, 69, 69B etc already contain a provision to disallow such setoff, however, there is no such provision for undisclosed income detected in income tax raids. Therefore, a new section 79A has been introduced to provide that set-off of losses brought forward, or otherwise, or unabsorbed depreciation under Section 32(2) will not be allowed to an assessee while computing his total income in any previous year which includes undisclosed income founded in the course of a search under section 132 or a requisition under section 132A or a survey under Section 133A, other than under section 133(2A). This amendment is applicable prospectively from FY 2022 onwards.
Definition of Slump Sale (Retrospective amendment)
Definition of slump sale under section 2(42C) has been amended to replace the word ‘sales’ with ‘transfer’. This amendment is applicable retrospectively from FY 2021 onwards.
Reduction of Goodwill from a block of assets is ‘transfer’ (Retrospective amendment)
From FY 2021 onwards, goodwill is not considered a depreciable asset. In the case where goodwill is purchased by an assessee, the purchase price of the goodwill is considered as the cost of acquisition for computation of capital gains under section 48 as reduced by depreciation availed until FY 2021. Section 50 has been amended to clarify that the reduction of the amount of goodwill from the block of asset following 43(6)(c)(ii)(B) shall be deemed to be ‘transfer’ and therefore, taxed accordingly. This amendment will take effect retrospectively from FY 2021 onwards.
Penalty under section 272A for false information
Under section 272A penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections etc. At present, the amount of penalty for failures listed under sub-section (2) of section 272A is INR 100 per day during which the failure continues. This penalty is now increased to INR 500 per day, based on recommendations of the Comptroller and Auditor General of India (CAG). This is applicable from FY 2022 onwards.
Withdrawal of certain exemptions
Exemptions under clauses (8), (8A), (8B) and (9) of section 10 has been withdrawn with effect from FY 2023 onwards.
Rationalisation of provisions relating to ‘Assessment’ and ‘Reassessment’
Provisions relating to assessment and reassessment have been rationalised to provide –
(a) Approval to issue a notice under section 148 will not be required if the Asessing officer has passed an order under 148A(d) with prior approval
(b) Provisions of section 132(8) shall apply to assessment/reassessment or recomputation under 143(3), 144, or section 147.
(c) New section 148B provides that order of assessment or reassessment or recomputation shall be passed by an Assessing Officer below the rank of Joint Commissioner, except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director, in respect of assessments consequent to search, survey and requisition to reduce avoidable inaccuracies.
(d) Section 153 has been amended to provide for the exclusion of the period of limitation for assessment, reassessment or recomputation, not exceeding 180 days from the commencement of search to the date of seizure. (retrospectively from FY 2021 onwards)
(e) Section 149(1)(b) has been amended to provide that a notice under section 148 shall be issued for 3-10 preceding assessment years only when the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented, (a) in the form of an asset; or (b) expenditure in respect of a transaction or to an event or occasion; or (c) an entry or entries in the books of account, which has escaped assessment amounts to or likely to amount to fifty lakh rupees or more. Earlier there was no requirement of having documents or evidence in possession but was merely based on an estimate.
Rationalisation of the provisions of Charitable Trust and Institutions
The provisions applicable to charitable trusts and institutions have been thoroughly reviewed and rationalised. It was important to ensure that the income of any fund, institution, trust, university, educational institution, hospital or other medical institution, which is exempt, is effectively monitored and implemented, is consistent and clear on taxation. Thereby, various provisions of section 10(23C) and 12AA/12AB have been accordingly amended.