The Finance (No. 2) Bill, 2019 has introduced and amended important incentive provisions under the Income tax Act which will give impetus to the growth story of India. It is often seen that after tax incentives are provided governments try to make conditions for such incentives stringent . However, the tax incentives provided in the Bill have in most cases expanded the scope of already available tax incentives. Further, the new tax incentives introduced are industry specific with a great potential of garnering investments and generating employment.
INCENTIVES TO INTERNATIONAL FINANCIAL SERVICES CENTRE (IFSC)
In order to promote the development of world class financial infrastructure in India, some tax concessions have already been provided in respect of business carried on from an IFSC by Finance Act, 2018.
Amendment to Section 47
Existing Provision:
Under the existing provisions of the section 47(viiab) of the Act, any transfer of a capital asset, being bonds or Global Depository Receipts or rupee denominated bond of an Indian company or derivative, made by a non- resident through a recognised stock exchange located in any IFSC and where the consideration for such transaction is paid or payable in foreign currency shall not be regarded as transfer.
Proposed Amendment
The Finance Bill proposes to expand the scope of Section 47( viiab). With a view to provide tax-neutral transfer of certain securities by Category III Alternative Investment Fund (AIF) in IFSC, it is proposed to amend the said section so as to provide that any transfer of a capital asset, specified in the said clause by such AIF, of which all the unit holders are non-resident, are not regarded as transfer subject to fulfilment of specified conditions.
It is further proposed to widen the types of securities listed in said clause by empowering the Central Government to notify other securities for the purposes of this clause.
Effective From
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
Amendment to Section 10
Proposed Amendment
With a view to facilitate external borrowing by the units located in IFSC, it is proposed to amend section 10 of the Act so as to provide that any income by way of interest payable to a non-resident by a unit located in IFSC in respect of monies borrowed by it on or after 1st day of September, 2019, shall be exempt.
Effective From
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
Amendment to Section 115O
Existing Provision
The existing provisions of the section 115-O of the Act, provide that no tax on distributed profits shall be chargeable in respect of the total income of a company, being a unit of an IFSC, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2017, out of its current income, either in the hands of the company or the person receiving such dividend.
Proposed Amendment
To facilitate distribution of dividend by companies operating in IFSC, it is proposed to amend the provision of the said section to provide that any dividend paid out of accumulated income derived from operations in IFSC, after 1st April 2017 shall also not be liable for tax on distributed profits.
Effective From
This amendment will take effect from 1st September, 2019.
Amendment to Section 115R
Existing Provision
The existing provisions of the section 115R of the Act, provide that any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income.
Proposed Amendment
In order to incentivize relocation of Mutual Fund in IFSC, it is proposed to amend the said section so as to provide that no additional income-tax shall be chargeable in respect of any amount of income distributed, on or after the 1st day of September, 2019, by a specified Mutual Fund i.e a mutual fund located in IFSC of which all the unit holders are non-residents and which fulfills certain other specified conditions.
Effective From
This amendment will take effect, from 1st September, 2019.
Amendment to Section 80LA
Existing Provision
The existing provisions of the section 80LA of the Act, inter alia, provide profit linked deduction of an amount equal to one hundred per cent of income for the first five consecutive assessment years and fifty per cent of income for the next five consecutive assessment years, to units of an IFSC.
Proposed Amendment
With a view to further incentivize operation of units in IFSC, it is proposed to amend the said section so as to provide that the deduction shall be increased to one hundred per cent for any ten consecutive years. The assessee, at his option, may claim the said deduction for any ten consecutive assessment years out of fifteen years beginning with the year in which the necessary permission was obtained.
Effective From
This amendment will take effect, from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
Amendment to Section 115A
Existing Provision
Section 115A of the Act provides the method of calculation of income-tax payable by a non- resident (not being a company) or by a foreign company where the total income includes any income by way of dividend (other than referred in section 115-O), interest, royalty and fees for technical services; etc. Section 80LA, provides for deduction in respect of certain incomes of a unit located in an IFSC. However, sub-section (4) of section 115A prohibits any deduction under chapter VIA which includes section 80LA.
Proposed Amendment
In order to ensure that units located in IFSC claim full deduction, it is proposed to amend section 115A of the Act so as to provide that the conditions contained in sub-section (4) of section 115A shall not apply to a unit of an IFSC and accordingly deduction under Section 80LA will be allowed.
Effective From
This amendment will take effect from the 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent years.
INCENTIVES TO NON-BANKING FINANCE COMPANIES (NBFCS)
Amendment of Section 43D
Existing Provision
The existing provisions of section 43D of the Act, inter-alia provides that interest income in relation to certain categories of bad or doubtful debts as may be prescribed [Rule 6EA & 6EB of I.T. Rules 1962] having regard to the guidelines issued by RBI in relation to such debts, received by public financial institutions, scheduled banks, cooperative banks, State financial corporations, State industrial investment corporations and public companies like housing finance companies, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account actually received, whichever is earlier. This provision is an exception to the accrual system of accounting. Said provision does not include NBFCs. However, recently Supreme Court in CIT v. Vasisth Chay Vyapar Ltd (2019) 410 ITR 244(SC) held that interest on Inter-Corporate Deposits (ICDs) which had become Non-Performing Asset (NPA) in terms of Prudential Norms issued by RBI, having not accrued, would not be taxable in hands of a non- banking financial company.
Proposed Amendment
With a view to provide a level playing field to certain categories of NBFCs who are adequately regulated, the finance bill proposes to amend section 43D of the Act so as to include deposit- taking NBFCs and systemically important non deposit-taking NBFCs within the scope of this section.
Consequentially, as per matching principle in taxation, it is proposed to amend section 43B of the Act to provide that any sum payable by the assessee as interest on any loan or advances from a deposit-taking NBFCs and systemically important non deposit-taking NBFCs shall be allowed as deduction if it is actually paid on or before the due date of furnishing the return of income of the relevant previous year.
As regards other NBFCs they will be governed by the ratio of decision of Supreme Court in CIT v. Vasisth Chay Vyapar Ltd (Supra).
Effective From
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent years.
RELAXATION IN CONDITIONS OF SPECIAL TAXATION REGIME FOR OFFSHORE FUNDS
Amendment of Section 9A
Existing Provision
Section 9A of the Act provides for a safe harbour in respect of offshore funds. It provides that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager located in India and acting on behalf of such fund shall by itself not constitute business connection in India of the said fund. Further, an eligible investment fund shall not be said to be resident in India merely because the eligible fund manager undertaking fund management activities on its behalf is located in India. The benefit under section 9A is available subject to the conditions provided in sub-sections (3), (4) and (5) of the said section. Sub-section (3) of section 9A provides for the conditions for the eligibility of the fund. These conditions, inter-alia, are related to residence of fund, corpus, size, investor broad basing, investment diversification and payment of remuneration to fund manager at arm’s length.
Proposed Amendment
Some of the conditions prescribed under sub- section (3) were found to be onerous by off shore funds.
On account of various Representations for relaxing certain conditions in the implementation of regime of fund managers and to give an impetus to fund management activities in India, certain constraints are proposed to be removed.
Firstly, under the existing provisions of section 9A(3)(j), the monthly average corpus of the eligible investment fund is required to be more than INR 100 crore by end of the financial year in which such fund is established/ incorporated. This provision was onerous as it became impracticable where a eligible investment fund is established/ incorporated close to the end of the tax year (say, in March). The Bill proposes to retrospectively amend the above requirement by providing that the cut-off date shall be (a) six months from the end of the month of fund’s establishment or (b) end of previous year, whichever is later.
Secondly, under the existing provisions of section 9A(3)(m) the remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken by him on its behalf is not less than the arms length price of said activity. The Bill proposes to amend section 9A(3)(m) to provide that the remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken by him on its behalf is not less than the amount calculated in such manner as may be prescribed.
Effective From
These amendments will take effect retrospectively from 1st April, 2019 and shall apply to the assessment year 2019-20 and subsequent assessment years.
TAX INCENTIVE FOR ELECTRIC VEHICLES
Insertion of new Section 80EEB – Deduction in respect of purchase of electric vehicle.
Proposed Amendment
Clause 25 of the Finance Bill has inserted new Section 80EEB to incentivise individuals who purchase electric cars. This new section is done with a view to improve environment and to reduce vehicular pollution. New section 80EEB provides for a deduction to an individual in respect of interest on loan taken for purchase of an electric vehicle from any financial institution up to one lakh fifty thousand rupees if the loan has been sanctioned by a financial institution including a non-banking financial company during the period beginning on the 1st April, 2019 to 31st March, 2023.
It is also proposed that where a deduction under this section is allowed for any interest, deduction shall not be allowed in respect of such interest under any other provisions of the Act for the same or any other assessment year.
Electric vehicle is defined as under
“electric vehicle” means a vehicle which is powered exclusively by an electric motor whose traction energy is supplied exclusively by traction battery installed in the vehicle and has such electric regenerative braking system, which during braking provides for the conversion of vehicle kinetic energy into electrical energy”
The memorandum to the Finance Bill contains an additional condition that the assessee does not own any other electric vehicle on the date of sanction of loan. However, this condition is not part of Section 80EEB in the Finance Bill. We will thus have to wait for the Finance Act for full clarity.
Effective From
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to assessment year 2020-2021 and subsequent assessment years.
EXEMPTION OF INTEREST INCOME OF A NON-RESIDENT ARISING FROM BORROWINGS BY WAY OF ISSUE OF RUPEE DENOMINATED BONDS REFERRED TO UNDER SECTION 194LC.
Insertion of section 10(4C)
Existing Provision
The existing provisions of section 194LC of the Act provide that the interest income payable to a non-resident by a specified company on borrowings made by it in foreign currency from sources outside India under a loan agreement or by way of issue of any long-term bond including long-term infrastructure bond, or rupee denominated bond shall be eligible for TDS at a concessional rate of five per cent.
Proposed Amendment
In order to incentivise low cost foreign borrowings through Off-shore Rupee Denominated Bond, the press release dated 17th September, 2018, inter alia, announced that interest payable by an Indian company or a business trust to a non-resident, including a foreign company, in respect of rupee denominated bond issued outside India during the period from September 17, 2018 to March 31, 2019 shall be exempt from tax. Consequently, no tax was required to be deducted on the payment of interest in respect of the said bond.
Subsequent to the press release there was confusion as Press release had itself stated that the contents of the press release would be incorporated in the Act but no such amendments had taken place.
Thus, the exemption announced through the said press release is now proposed to be incorporated in the law by amending section 10 of the Act so as to provide exemption to income payable by way of interest to a non-resident by the specified company in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond, as referred to in section 194LC, during the period begining from the 17th day of September, 2018 and ending on the 31st day of March, 2019.
Effective From
This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.
TAX INCENTIVE FOR AFFORDABLE HOUSING
Insertion of new Section 80EEA
Proposed Amendment
At present, Section 80EE provides for deduction of interest upto ₹ 50,000/- for acquisition of a residential property whose value does not exceed ₹ 50,000/-
In order to provide further impetus to the ‘Housing for all’ objective of the Government and to enable the home buyer to have low-cost funds at his disposal, the Finance Bill proposes to insert a new section 80EEA in the Act so as to provide a deduction to an individual assesse in respect of interest up to ₹ 1,50,000/- on loan taken for residential house property from any financial institution subject to the following conditions:
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loan has been sanctioned by a financial institution during the period beginning on the 1st April, 2019 to 31st March 2020.
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the stamp duty value of house property does not exceed forty-five lakh rupees;
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assessee does not own any residential house property on the date of sanction of loan. It is also proposed that where a deduction under this section is allowed for any interest, deduction shall not be allowed in respect of such interest under any other provisions of the Act for the same or any other assessment year.
Though the finance Minister in her speech mentioned that the deduction u/s 80EEA will be over and above the deduction under section 24(b), there is no clarity about the same under Section 80EEA.
Effective From
This amendment will take effect from 1st April, 2020 and will accordingly apply in relation to assessment year 2020-21 and subsequent assessment years.
Amendment to Section 80IBA
Existing Provision
The existing provisions of the section 80-IBA of the Act, inter alia, provide that where the gross total income of an assessee includes any profits and gains derived from the business of developing and building housing projects, there shall, subject to certain conditions, be allowed, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business.
Proposed Amendment
With a view to align the definition of “affordable housing” under section 80-IBA with the definition under GST Act, it is proposed to amend the said section so as to modify certain conditions i.e conditions under clause (d) to (i) are substituted with new clause (d) to (i). The new conditions will be applicable to the housing project approved on or after 1st day of September, 2019.
The modified conditions are as under:
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the assessee shall be eligible for deduction under the section, in respect of a housing project if a residential unit in the housing project have carpet area not exceeding 60 square meter in metropolitan cities or 90 square meter in cities or towns other than metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, 12 Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); and
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the stamp duty value of such residential unit in the housing project shall not exceed forty five lakh rupees;
Effective from
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to assessment year 2020-21 and subsequent assessment years.
INCENTIVES TO NATIONAL PENSION SYSTEM (NPS) SUBSCRIBERS
With a view to benefit employees particularly of the Central Govt, the Finance Bill has Amended Section 10(12A), Section 80CCD and Section 80C to increase the ambit and scale of incentive.
Amendment to Section 10(12A)
Existing Provision
(i) Under the existing provisions of section 10(12A) of the Act, any payment from the NPS Trust to an assessee on closure of his account or on his opting out of the pension scheme referred to in Section 80CCD, to the extent it does not exceed forty per cent of the total amount payable to him at the time of such closure or on his opting out of the scheme, is exempt from tax.
Proposed Amendment
With a view to enable the pensioner to have more disposable funds, it is proposed to amend the said section so as to increase the said exemption from forty per cent to sixty per cent of the total amount payable to the person at the time of closure or his opting out of the scheme.
Effective From
This amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to assessment year 2020-21 and subsequent assessment years.
Amendment to Section 80CCD
Existing Provision
Under the existing provisions of section 80CCD of the Income-tax Act, in respect of any contribution by the Central Government or any other employer to the account of the employee in a notified pension scheme, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer, as does not exceed ten per cent of his salary in the previous year.
Proposed Amendment
The Central government has enhanced its contribution to employees account in the National pension Scheme from 10% to 14% as per Notification F No. 1/3/2016 dtd 31/1/2019.
Thus, in order to ensure that the Central Government employees get full deduction of the enhanced contribution, the finance bill proposes to increase the limit from ten to fourteen per cent. of contribution made by the Central Government to the account of its employee.
This amendment applies only to Central Government employees.
Effective From
This amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to assessment year 2020-21 and subsequent assessment years.
Amendment to Section 80C
Proposed Amendment:
To enable the Central Government employees to have more options of tax saving investments under National Pension System, the Finance bill proposes to amend section 80C so as to provide that any amount paid or deposited by a Central Government employee as a contribution to his Tier-II account of the pension scheme shall be eligible for deduction under the said section.
Effective From
This amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to assessment year 2020-21 and subsequent assessment years.
INCENTIVES FOR START-UPS
Section 79 – Carry forward and Set off of Losses in case of certain companies. Existing Provision
Section 79 of the Income Tax Act provides conditions for carry forward and set off of losses in case of a company not being a company in which the public are substantially interested. Clause (a) of this section applies to all such companies, except an eligible start-up as referred to in section 80-IAC, while clause
(b) applies only to such eligible start-up.
Thus for Companies other than eligible start- ups, under clause (a) of Section 79, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, unless on the last day of the previous year, the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.
As far as eligible start-ups are concerned, under clause (b) of Section 79, the loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, if :
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all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and
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such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.
The clause (b) was inserted vide Finance Act, 2017 in order to facilitate ease of doing business and to promote start-up India.
Proposed Amendment
In-order to further facilitate ease of doing business in the case of an eligible start-up, the Finance Bill provides that loss incurred in any year prior to the previous year, in the case of closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions stipulated currently at clause (a) or clause (b). Thus, an eligible start up for carry forward and set-off of losses may satisfy in a particular year either of the following :
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on the last day of the previous year, the shares of the company carrying not
less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.
Or
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(i) all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and
(ii) such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.
This amendment will boost fresh investment in Start-ups.
For other closely held companies, there would be no change, and loss incurred in any year prior to the previous year shall be carried forward and set off only on satisfaction of condition currently provided at clause (a).
Effective From
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
Amendment of Section 54GB
Existing Provision
The existing provisions of the section 54GB of the Income-tax Act, inter alia, provide for roll over benefit in respect of capital gain arising from the transfer of a long-term capital asset, being a residential property owned by an eligible assesse i.e individual or HUF.
To be able to get benefit of this provision, the assessee is required to utilise the net consideration for subscription in the equity shares of an eligible company before the due date of filing of the return of income. Post subscription, the assessee is required to have more than fifty per cent share capital or more than fifty per cent voting rights in the eligible company. Further, the said section, puts restriction on transfer of assets acquired by the company for five years from the date of acquisition.
Currently the benefit of this section was only available for investment in the equity shares of eligible start-ups and that period also got over on 31st March 2019. Thus, at present no benefit is available for residential property transferred after 31st March 2019.
Proposed Amendment:
In order to incentivise investment in eligible start-ups, following amendments are proposed :
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extend the sun set date of transfer of residential property for investment in eligible start-ups from 31st March 2019 to 31st March 2021;
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relax the condition of minimum shareholding of fifty per cent of share capital or voting rights to twenty five per cent.
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relax the condition restricting transfer of new asset being computer or computer software from the current five years to three years.
Effective From
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
INCENTIVES FOR CATEGORY II ALTERNATIVE INVESTMENT FUND (AIF)
Amendment to Section 56(2)(viib)
Existing Provision
The existing provisions of the said section 56 of the Income-tax Act, inter alia, provide that where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be charged to tax. However, exemption from this provision has been provided for the consideration for issue of shares received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Currently the benefit of exemption is available to Category I AIF.
Proposed Amendment:
With a view to facilitate venture capital undertakings to receive funds from Category II AIF, it is proposed to amend the said section to extend this exemption to fund received by venture capital undertakings from Category II AIF as well.
Effective from
This amendment will take effect, from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.