At the time of the presentation of the Budget before the Parliament, a Finance Bill is also presented detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the budgeted estimates. The Finance bill is introduced every year to give effect to the financial proposals of the Government for the subsequent financial year and any supplementary financial proposals for any period. In simple terms, Government presents its budget estimates in Annual Financial Statements, however, to achieve those estimates various laws may be required to be amended. A gist of all such amendments and other provisions is presented as a Finance bill. The finance bill can only be introduced in Lok Sabha and also requires the prior recommendation of the President. Thus, before presenting the budget in Lok Sabha, the salient features of the budget are first presented to the President of India, then to the cabinet ministry and finally in the Lok Sabha. Following are some of the key tax changes proposed in the finance bill that affect the businesses and startups –
Delayed payments to MSMEs will be disallowed under section 43B
From FY 2024 onwards, any pending dues to micro or small enterprises will be disallowed under section 43B(h). This is going to result in huge disallowances for taxpayers who generally purchase on credit with longer payment settlement periods. While the law intends to promote timely payment to MSME enterprises, various industries have mutually negotiated longer credit periods such as 50 days, 2 months, 3 months, etc. The new provision would also boost tax collection for the Government, on the back of corporate taxpayers.
- For expenses listed under section 43B, the deduction is allowed only if the payment has been made. As per the newly inserted clause (h), payments to MSMEs must be paid within the time limit specified under per Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
- As per MSMED Act, dues to MSMEs must be settled within 15 days, if there is no written agreement, or otherwise, within the time specified in the written agreement. However, such a period cannot exceed 45 days even if there is a written agreement. Thus, any payment outstanding on the balance sheet will be disallowed if the same is not paid by April 15, or May 15 of the next year, as applicable. The such disallowed expense would be allowed in the next financial year when such payment is made.
- Enterprises with turnover less than INR 5 crore and fixed assets less than INR 1 crore are termed Micro enterprises. Similarly, enterprises with turnover less than INR 50 crore, and fixed assets less than INR 10 crore are termed Small enterprises. Only payments to micro and small enterprises are covered under section 43B(h). Payments to Medium enterprises that have turnover less than INR 100 crore and fixed assets less than INR 20 crore are not covered by this new law.
- Tax auditors are required to such disallowances under section 43B in their audit report and therefore, it is not possible to escape such disallowance.
- Proviso to section 43B allows claiming such disallowed expenses if the same is paid off before filing an income tax return. However, this proviso will not apply to payments made to MSMEs.
The threshold for the presumptive taxation scheme has been increased
Under section 44AD, a taxpayer can opt to declare profits at 6-8% of the gross turnover, and thereafter, be exempt from the provisions of maintaining books of account and tax audit. Similarly, under section 44ADA, a professional can opt to declare profits at 50% of the gross receipts. Currently, the threshold under sections 44AD and 44ADA is INR 2 crore and INR 50 lakh respectively. Now, these thresholds have been increased to INR 3 crore and INR 75 lakh respectively. However, these increased thresholds shall apply only if the total cash receipts do not exceed 5% of the total turnover for the year. These amendments will be effective from FY 2024 onwards.
Recognised startups are allowed to carry forward losses for ten years
Section 79 restricts carrying forward and setting off losses if there is a change in more than 51% shareholding of a company. However, this restriction does not apply to startups recognised under the ‘Startup India, Standup India’ programme. Under section 80-IAC, the recognised startups are allowed to carry forward losses incurred in the first ten years since incorporation, in general, while allowed to carry forward losses incurred in the first seven years if there is a change in shareholding but the existing shareholders continued to hold their stake. Section 79(1) is now amended to allow the carrying forward of losses incurred in the first ten years since incorporation in the case of recognised startups, even if there is a change in shareholding by more than 51% if the existing shareholders continue to hold their stake.
Extension of the ‘Startup India, Standup India’ scheme benefits
Section 80-IAC provides tax benefits to startups recognised under the Startup India, Standup India scheme. To avail of the benefits, the startup must be incorporated between April 1, 2016, to March 31, 2023. The last date to be eligible to avail of the benefits of this scheme has been extended to March 31, 2024.
Cost of acquisition of intangible assets to be Nil
Section 55(1)(b)(1) and 55(2)(a) have been amended to provide that cost of acquisition and cost of improvement of an intangible asset or any right, other than those specifically mentioned in the section, shall be Nil. The amendment has been brought in to put an end to numerous litigations surrounding the same since there was no specific provision in the law. This amendment is effective from FY 2024 onwards.
Valuation of inventories by Cost Accountant to prevent undervaluation
Businesses often undervalue their inventory and defer taxes. To ensure inventory is valued as per income tax rules, section 142 now permits the Assessing Officer to obtain an inventory valuation report from a Cost Accountant nominated by the Principal Commissioner at the expense of the Central Government. The period of such valuation shall be excluded from the time limit for assessment under section 153. Section 295 is also amended to provide powers to make rules in this regard and prescribe the format of such a report. These amendments will be effective from FY 2023 onwards.
Relaxations in claiming preliminary expenditure
Preliminary expenses such as feasibility reports, project reports, etc. which are incurred before the commencement of business, or after commencement, concerning the setting up of a new unit, are allowed to be claimed as expenses by way of amortisation. Such expenses are allowed to be claimed only if such preliminary activity is carried out by the company itself, or by a concern approved by the CBDT. This condition has been relaxed and now the company only needs to submit a statement containing particulars of expenditure to the income tax department. This amendment will be effective from FY 2024 onwards.
- Section 56(2)(xii) has been introduced to tax income received by a unit holder from a business trust which is not covered under section 10(23FC) or 10(23FCA) and is not taxable under section 115UA(2). This provision has been introduced to tax the distribution of money by business trust i.e. REIT and InVIT, to its unit holders under the name of ‘repayment of debt’.
- If a company receives any consideration for the issue of shares that exceeds the fair value of such shares, such excessive consideration is taxable under income from other sources under section 56(2)(viib). This is commonly referred to as ‘Angel Tax’. This section has been amended to include consideration received from a non-resident company as well, by removing the phrase ‘being a resident’.
- Under section 10AA, 15 years tax holiday is provided to a unit established in Special Economic Zone (SEZ). Now, the benefit shall be available only if the return is filed within the due date. Further, deduction under this section shall be available only if the proceeds from the sale of goods or services are received within six months from the end of the financial year.
- Under section 44BB and section 44BBB, if a taxpayer is opting for the presumptive schemes, brought forward losses and unabsorbed depreciation will not be allowed to be set off against presumptive income.