Taxmann has systematically analyzed the several amendments made to the Finance Bill 2016 at the stage of its being passed by the Lok Sabha. Several of the changes are of critical importance to taxpayers:
“On May 5, 2016, the Lok Sabha passed the Finance Bill. The Bill which was presented originally in the Lok Sabha on February 29, 2016 has not been passed in its original shape. Various changes have been made in the Bill. New amendments have been proposed. Some earlier proposed amendments have been removed, so on and so forth. A snippet of all changes made in the Finance Bill, 2016 as passed by the Lok Sabha viz-a-viz the Finance Bill, 2016 presented originally in the Lok Sabha are presented hereunder.
1. Unlisted shares held for 24 months or less would be treated as short-term capital asset
As per section 2(42A) of the Income-tax Act, any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer is treated as short-term capital asset.
The aforesaid period of 36 months is treated as 12 months in case of shares held in a company. However, an amendment was made by Finance Act (No. 2) Act, 2014 to provide that the said period of 12 months won’t be applicable in respect of shares not listed in recognized stock exchange. Hence, with effect from 01.04.2015, unlisted share is treated as short-term capital asset if it is held for not more than 36 months immediately preceding the date of its transfer.
The Finance Bill, 2016 as passed by the Lok Sabha inserted a new clause to provide that the period of 36 months would be substituted with period of 24 months in case of unlisted shares. In other words, unlisted shares of company would be treated as short-term capital asset if it is held for a period of 24 months or less immediately preceding the date of its transfer.
2. When employer’s annual contribution is deemed as income received by employee
The Finance Bill, 2016 proposed an amendment to the Fourth Schedule of the Income-tax Act to provide that lower of the following shall be deemed as income of the employee:
(i) Annual contribution made by employer in excess of 12% of salary to the recognized provident fund account of the employees;or
(ii) Rs. 1,50,000
The Finance Bill, 2016 as passed by the Lok Sabha provides that any contribution by employer in excess of 12% of salary to the recognized provident fund account of the employees shall be deemed as income of employee. The ceiling limit of Rs. 1.50 lacs has been removed from the approved Finance Bill.
3. TCS collection at the time of receipt only in specific cases
The Finance Bill, 2016 proposed that every seller of a motor vehicle shall collect TCS at the rate of 1% of value of motor car if such value exceeds ten lakh rupees. Such tax was proposed to be collected from the buyer under section 206C at the time of debiting the amount receivable or at the time of receipt, whichever happened earlier.
The Finance Bill, 2016 as passed by the Lok Sabha provides that tax shall be collected under Section 206C only at the time of receipt of consideration.
4. Section 270A –Computation of tax on under-reported income
Under the existing provisions, penalty on account of concealment of income or on furnishing of inaccurate particulars of income is levied under Section 271(1)(c). In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, new Section 270A has been proposed to be inserted. It provides for levy of penalty in cases of underreporting and misreporting of income.
It is proposed that rate of penalty shall be 50% of tax in case of under reporting of income and 200% of tax in case of misreporting of income. Following amendments to Section 270A have been approved by the Lok Sabha:
(i) What constitutes under-reporting of income: The Finance Bill, 2016 proposed six instances where a person shall be deemed to have underreported his income. However, the Finance Bill, 2016 as passed by the Lok Sabha has included one more instance of underreporting of income. A person shall also be deemed to have underreported his income where the amount of total income reassessed as per Section 115JB or Section 115JC (MAT or AMT) provisions is greater than the deemed total income assessed or reassessed under provisions of the MAT or the AMT immediately before such reassessment.
(ii) Tax payable on underreporting of income: The existing clause of the Finance Bill, 2016, proposed a flat tax rate of 30% in respect of underreported income in case of Individuals, HUF, AOP, BOI, Artificial Juridical person. The Finance Bill, 2016 as passed by the Lok Sabha provides that the tax payable in respect of the underreported income shall be as under:
(a) Return not furnished: Where return of income has not been furnished and the income has been assessed for the first time, the tax shall be calculated on underreported income as increased by maximum amount not chargeable to tax.
(b) In case of loss: Where the total income assessed or re-assessed is a loss, the tax shall be calculated on underreported income as if it was the total income.
(c) In any other case: Tax on underreported income as increased by income assessed or re-assessed originally less tax on income assessed or re-assessed originally.
5. Under reporting of income shall be punishable as willful attempt to evade tax
The Finance Bill, 2016 proposed insertion of a new Section 270A to levy penalty in case of under reporting and misreporting of income by assessee. However, there was no corresponding provision to invoke prosecution in this case.
Section 276C provides for rigorous imprisonment of minimum 3 months to 7 years in case an assessee has made willful attempt to evade tax.
The Finance Bill, 2016 as passed by the Lok Sabha amends Section 276C to provide that under reporting of income as per section 270A shall be punishable with rigorous imprisonment under section 276C.
6. Processing of returns before scrutiny assessment
The Finance Bill, 2016 proposed mandatory processing of returns under Section 143(1) even when the scrutiny assessment notice is issued to the assessee. This amendment was proposed so that the assessee need not to wait for the refunds, if any, due to him till the scrutiny assessment was completed.
The Finance Bill, 2016 had provided that return shall be processed before issuing assessment order under section 143(3). However, the finance bill as passed by the Lok Sabha provides that the processing of return is not necessary before the expiry of one year from the end of the financial year in which return is furnished, where a notice is issued for scrutiny assessment under Section 143(2).
7. Benefit of 25 percent tax rates on certain domestic companies
The Finance Bill, 2016 proposed insertion of new section 115BA to provide benefit of concessional tax rate of 25% to certain domestic companies engaged in the business of manufacturing or production of any article or thing, provided such company has been set-up and registered on or after March 1, 2016.
The Finance Bill, 2016 as passed by the Lok Sabha provides that benefit of concessional tax rate shall also be available to the companies engaged in research in relation to or distribution of article or thing manufactured or produced by it.
The Finance Bill, 2016 also proposed that to avail of the concessional rate of tax, domestic company shall exercise the option in the prescribed manner on or before due date of furnishing the return of income under section 139(1) for the relevant previous year.
It is also provided that once the option to avail of benefit of concessional tax rate has been exercised by the company for any previous year, it cannot subsequently withdraw the same or for any other previous year.
8. Cost of acquisition of asset declared under Income Declaration Scheme, 2016
The Finance Bill, 2016 proposed Income Declaration Scheme, 2016 to provide an opportunity to taxpayers to declare their undisclosed income and pay tax, surcharge and penalty in aggregate at 45% of such undisclosed income.
It is provided under the scheme that where the income chargeable to tax is declared in the form of investment in any asset, the fair market value of such asset as on the date of commencement of this scheme shall be deemed to be the undisclosed income.
The Finance Bill, 2016 as passed by the Lok Sabha provides that the cost of acquisition of such asset shall be deemed to be the fair market value taken into account for purposes of Income Declaration Scheme, 2016.
9. LLPs can be ‘Eligible start-ups’
The Finance Bill, 2016 proposed a new section 80-IAC to provide 100 percent deduction for 3 consecutive assessment years to an ‘eligible Start-up’engaged in an eligible business. Such deduction may, at the option of assessee, be claimed for any three consecutive AYs out of the five years beginning from the year in which eligible startup is incorporated. The ‘eligible start-up’is proposed to be defined to mean a ‘company’engaged in an eligible business.
The Finance Bill, 2016 as passed by the Lok Sabha extends the definition of ‘eligible start-up’to include ‘limited liability partnership’also. In other words, LLPs shall also be eligible to claim deductions under Section 80-IAC subject to fulfilment of other conditions.
10. Levy of additional tax on dividend
The Finance Bill, 2016 had proposed an additional tax of 10% if amount of dividend received by a taxpayer exceeds Rs. 10 Lakhs.
The Finance Bill, 2016 as passed by the Lok Sabha clarified that dividend whether paid or declared or distributed by one or more domestic companies, the aggregate of dividend shall be considered for the limit of Rs.10 lakhs but Tax shall be payable only on the amount of dividend exceeding Rs 10 lakhs.
11. Tax on income from patent developed and registered in India
The Finance Bill, 2016 proposed insertion of new section 115BBF to tax royalty income in respect of a patent developed and registered in India at the rate of 10%.
The Finance Bill, 2016 as passed by the Lok Sabha inserts two new sub-sections in Section 115BBF to provide as follows:
(a) Assessee may exercise the option for taxation of income from patents in accordance with the provisions of section 115BBF, in prescribed manner on or before the due date of furnishing of return of income under section 139(1) of the relevant previous year.
(b) If assessee opts for taxation of income from patents as per section 115BBF in any previous year and fails to offer tax on income from patents as per section 115BBF in any of the 5 succeeding assessment years then he shall not be eligible to claim benefit of said section for 5 assessment years subsequent to the assessment year in which such income has not been offered to tax as per section 115BBF.
The Finance Bill, 2016 also provided that for the purpose of section 115BBF, patent shall be developed and registered in India. The word ‘developed’had been described in the Explanations to mean the expenditure incurred by the assessee for any invention in respect of which patent is granted under the Patents Act, 1970.
The Finance Bill, 2016 as passed by the Lok Sabha specifically provides that the meaning of “developed”shall mean at least 75 percent of the expenditure incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970.
12. Transfer of shares through a recognized stock exchange located in IFSC
In order to mobilise growth of International Financial Services Centres (IFCS), the Finance Bill, 2016 proposed that no Securities Transaction Tax (‘STT’) and Commodities Transaction Tax (‘CTT’) shall be levied on transactions of securities carried out through recognized stock exchange located in IFSC where the consideration for such transaction is paid or payable in foreign currency.
Consequently, it was proposed to amend the section 10(38) of the Income-tax Act to provide that long-term capital gains arising from transfer of equity shares, equity oriented mutual fund or units of business trust shall be exempt from tax if the transaction is undertaken in foreign currency through a recognised stock exchange located in an IFSC, even if STT is not paid in respect of such transactions.
However, no such amendment was proposed to section 111A [short-term capital gain arising from transfer of listed securities].
Therefore, the Finance Bill, 2016 as passed by the Lok Sabha makes similar amendment to section 111A to provide that short-term capital gains arising from transfer of underlying securities shall be taxable at 15%, if the transaction is undertaken in foreign currency through a recognised stock exchange located in an IFSC, even if STT is not paid in respect of such transactions.
13. Amortization of spectrum fee
The Finance Bill, 2016 proposed to insert a new section 35ABA to provide that the spectrum fee paid for auction of airwaves shall be allowed to be deducted over the useful life of the spectrum.
The Finance Bill, 2016 as passed by the Lok Sabha also provides for consequences if specified conditions are not fulfilled. If subsequently there is a failure to comply with any of the conditions, the deduction shall be treated as wrongly allowed and the Assessing Officer may re-compute the total income of the assessee for the respective previous years. It is also provided that the provisions of Section 154 shall apply for four years from the end of the year in which the default is made.
14. Relief to specific Non-Residents from the tax deduction under section of 194LBB
The Finance Act, 2015 had inserted a special taxation regime in respect of Category I and II Alternative Investment Funds (investment fund) registered with the SEBI. Under this regime the income of the investment fund (not being in the nature of business income) is exempt in the hands of investment fund. However, income received by the investor from the investment fund (other than the income which is taxed at the level of investment fund) is taxable in their hands. Accordingly, Section 194LBB was inserted for deduction of tax in respect of payment made to such investors.
The existing provisions of section 194LBB provide that in respect of any income credited or paid by the investment fund to its investor (resident or non-resident), a tax deduction at source (TDS) shall be made by the investment fund at the rate of 10% of the income. This TDS regime had created certain difficulties that non-resident investors, whose income was not taxable as per the relevant DTAA, were not able to claim benefit of lower or nil rate of taxation. Even section 197 didn’t provide for any facility to the deductee to approach the Assessing Officer for seeking certificate for TDS at a lower or nil rate in respect of deductions made under section 194LBB.
The Finance Bill, 2016 proposes to amend the section 194LBB to provide that tax shall be deducted at the rate of 10% where payee is resident. Where the payee is non-resident or foreign company, tax shall be deducted at the rates in force.
The Finance Bill, 2016 as passed by the Lok Sabha inserts a proviso that where payee is a non-resident, no tax shall be deducted in respect of any income which is not chargeable to tax.
15. Withdrawal of amendments relating to retirement funds
I. Recognized Provident Fund
The Finance Bill, 2016 proposed to amend Fourth Schedule so as to provide that:
(a) Contribution: Employer’s contributions to the recognized provident fund account of the employees shall not be chargeable to tax to the extent of 12% of employee’s salary or Rs.1,50,000, whichever is less.
(b) Withdrawal of employee’s contribution: Any withdrawal from the accumulated balance in the provident fund account, which is attributable to employee’s contribution made on or after April 1, 2016, shall not be chargeable to tax up to 40 % of such accumulated balance.
The Finance Bill, 2016 as passed by the Lok Sabha withdraws such amendment to the Fourth Schedule and maintains the status-quo for the taxability of contribution to and withdrawal from the provident fund account.
II. Withdrawal from superannuation fund account
The Finance Bill, 2016 proposed that any payment in lieu of or in commutation of an annuity purchased out of contributions made on or after April 1, 2016, where it exceeds 40% of annuity, shall be chargeable to tax.
The Finance Bill, 2016 as passed by the Lok Sabha withdraws such an amendment.
16. Rate of MAT for unit located in IFSC
The Finance Bill, 2016 had proposed to reduce the MAT rate from existing 18.5% to 9% in case of unit located in International Financial Services Center (‘IFSC’)
In order to enjoy the lower MAT rate, following conditions were to be satisfied:
• The taxpayer is a unit established in IFSC
• The unit must be a new unit established on or after April 1, 2016
• It should derive its income solely in convertible foreign exchange
All units that fulfill the above conditions shall have to compute MAT at 9% of book profit instead of normal rate of 18.5%.
The Finance Bill, 2016 as passed by the Lok Sabha withdraws the condition of establishment of new IFSC unit after April 1, 2016. Consequently, the benefit of reduced rate of MAT shall also be given to those units which have been set up before April 1, 2016.
17. Immunity from penalty and prosecution in certain cases
The Finance Bill, 2016 proposed to insert section 270AA to provide immunity to the assessee from penalties under section 270A and prosecution under section 276C if the assessee pays the tax and interest within the time prescribed by the notice, provided assessee does not file an appeal against the order.
The Finance Bill, 2016 as passed by the Lok Sabha also includes immunity from prosecution under Section 276CC in the new Section 270AA.
18. Tax on Accreted Income of Trusts
The Finance Bill, 2016 proposed to insert a new Chapter XII-EB, containing Section 115TD, 115TE and 115TF, under the Act to provide that ‘accreted income’of a trust or institution registered under section 12AA shall be chargeable to tax at the maximum marginal rates in following circumstances:
(a) If the trust or institution gets converted into any form which is not eligible under section 12AA;
(b) If the trust or institution gets merged into any entity which is not eligible under section 12AA;
(c) If the trust or institution, in case of dissolution, fails to transfer its assets to exempt entities under section 12AA and section 10(23C) (iv), (v), (vi) &(via).
The difference between the fair market value of the assets and liabilities of the trust or institution would be treated as ‘accreted income’and tax thereon shall be paid in addition to the income-tax chargeable in respect of the total income of such trust or institution.
The Finance Bill, 2016 as passed by the Lok Sabha makes certain changes in the proposed Section 115TD, as under:
A. Assets which don’t form part of accreted income
A proviso is inserted in Section 115TD to provide that the value of the following assets shall not be taken into consideration while computing the ‘accreted income’:
(a) Any asset acquired by a trust or institution out of its agricultural income.
(b) Any asset acquired by the trust before getting registered under section 12AA provided that no exemption under section 11 or 12 is provided to trust or institution during that period.
B. Time-limit to pay tax on accreted income
As per section 115TD, a trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA in a previous year on occurrence of following events:
(a) when registration granted to it under Section 12AA has been cancelled;or
(b) It has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it:
■ has not applied for fresh registration under Section 12AA in the said previous year;or
■ has filed application for fresh registration under Section 12AA but the said application has been rejected.
It was proposed under Finance Bill, 2016 that the tax on accreted income shall be payable within 14 days from date of receipt of order cancelling registration or date of order rejecting application for fresh registration.
The Finance Bill, 2016 as passed by the Lok Sabha has proposed new time-limit for payment of tax on accreted income. It has been prescribed that tax on accreted income shall be paid within 14 days from:
(a) the date on which the period for filing appeal before ITAT against the order cancelling the registration (or order rejecting the application) expires, if no appeal has been filed by the trust or the institution;or
(b) the date on which the order in any appeal, confirming the cancellation of the registration (or application), is received by the trust or institution.
C. Validity of registration obtained under section 12A
The Finance Bill, 2016 as passed by the Lok Sabha has made a clarificatory amendment to provide that registration under section 12AA shall include any registration obtained under section 12A.
19. Section 80-IBA –Profit linked deduction on housing projects
The Finance Bill, 2016 proposed insertion of a new Section 80-IBA which provides for deductions from profit arising from the business of developing and building housing projects. Such deduction is available subject to fulfillment of certain conditions where project is located within cities of Chennai, Delhi, Kolkata or Mumbai or within acceptable distance from municipal limits. The Finance Bill, 2016 as passed by the Lok Sabha provides that the distance from municipal limits shall be measured aerially. Further, it is mentioned clearly that the ‘built-up area’of the residential unit shall be relevant to check if the size of the residential unit is within threshold limit of 30 sq. meter or 60 sq. meter, as the case may be.
20. Limit on deduction in respect of expenditure on agricultural extension project
The Finance Bill, 2016 had proposed to limit the deduction allowed under section 35CCC from existing 150% to 100% w.e.f April 1, 2018 (Assessment year 2018-19).
The Finance Bill, 2016 as passed by the Lok Sabha defers the applicability of this provision from April 1, 2018 to April 1, 2021 (Assessment Year 2021-22).