The proposal of the government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by the Parliament are submitted to the Parliament through Finance Bill, which is a key document of Union Budget Papers.
In this year 2019, we firstly had an interim budget and then a final budget. The interim budget was presented by the then Finance Minister Mr. Piyush Goel on 1st February, 2019 and the provisions of Finance Bill, 2019 contained therein became an Act on 21st February, 2019. In this interim budget, few amendments were made in the Income Tax Act, 1961 and the same is now part of Income Tax Act, 1961 (hereinafter referred to as “the Act”).
After winning the election with clear majority, the new Finance Minister Madam Sitaraman presented Finance (No. 2) Bill, 2019 on 5th July, 2019 (hereinafter referred to as “FB No. 2”) before the Parliament. The FB No. 2 contained various proposals for amending the Act, to continue to provide momentum to the buoyancy in direct taxes through deepening and widening of the tax base, promoting less cash economy, reducing the corporate tax rate for small enterprises, strengthening anti-abuse measures, providing tax incentives, removing difficulties of taxpayers and enhancing the effectiveness of the tax administration. Certain Amendments have been made to FB No. 2 by way of insertion of new proposals, removing existing one and making changes in some of it, before it was presented before the Lok Sabha for debate discussion and passing. The Lok Sabha passed FB No. 2 with Amendments on 18th July, 2019. It received assent of Hon’ble President on 1st August, 2019. The Amended proposals as enacted are now part of the Act.
In this article, we are dealing with some of the major Amendments made to FB No. 2 in the income tax arena before it was passed by the Lok Sabha. The amendments made is other than areas such as Prohibition of Benami Property Transaction Act, 1988, and Prevention of Money Laundering Act, 2002 are not covered in this article.
1. Deemed accrual of gift made to a person outside India [Section 9]:
As per section 5 of the Act, non-residents are taxable in India in respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or is deemed to be received in India. Section 9 of the Act relates to Income deemed to accrue or arise in India. Under the existing provisions of the Act, a gift of money or property is taxed in the hands of donee, except for certain exemptions provided in clause (x) of sub-section (2) of section 56 of the Act. When an amount is received as a gift (gift of money or property) by a non-resident outside India from an Indian Resident, it does not fall within a scope of taxable income u/s. 5 of the Act (as it is neither received in India nor accrues / arises or deemed to accrue / arise in India).
To bring such gifts made by residents to persons outside India within tax net, it was proposed in FB No. 2 that income of the nature referred to in section 2(24)(xviia) of the Act, arising from any sum of money paid, or any property situated in India transferred, on or after 5th July, 2019, by a resident in India to person outside India, shall be deemed to accrue or arise in India. Section 2(24) of the Act defines “income” and as per clause (xviia) the income includes – any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56.
The section 56(2)(x) refers to receipt by a person from any other person:
An amendment was made in this proposal of FB No. 2 by substituting new clause (viii) in section 9(1) of the Act, details of which are as under:
Proposal as per FB No. 2 |
Amendment to Proposal of FB No. 2, which is passed by Lok Sabha |
It is proposed to insert following clause in sub-section (1) of section 9:
“(viii) income of the nature referred to in sub-clause (xviia) of clause (24) of section 2 of the Act, arising from any sum of money paid, or any property situated in India transferred, on or after the 5th day of July, 2019 by a person resident in India to a person outside India.”. |
Income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid on or after the 5th day of July, 2019 by a person resident in India to a non-resident, not being a company, or to a foreign company. |
Income arising from transfer of property situated in India is now removed from the ambit of this proposal of FB No 2 leaving the amendment only in respect of sum of money paid without consideration. Further, the phrase “person outside India” is replaced with “non-resident, not being a company or a foreign company”. The scope of taxability under section 9(1)(viii) of the Act is restricted to sum of money (without consideration) received by a non resident from a resident.
However, income of the nature referred to in sub-clause (xviia) of clause (24) of section 2 of the Act, arising from any property situated in India transferred, by a person resident in India to a non resident is still not out of the scope of taxation.
The Existing Section 9(1)(i) of the Act provides that all income accruing or arising whether directly or indirectly, from any property in India and/or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India.
Section 2(24) of the Act includes transfer of a property as per section 56(2)(x) of the Act.
For Section 56(2)(x) of the Act, the term “Property” is defined u/s 56(2)(vii) of the Act and it includes specified nine items (including immovable property).
Reading all the three sections together viz., section 2(24) (xviia), 9 (1)(i) and 56(2)(x) of the Act, it is stated that –
-
transfer of nine specified “properties” in India (as per section 56(2)(vii));
-
from a resident to non resident;
-
without consideration and / or without adequate consideration (as per section 56(2)(x));
-
to a non-exempt person (as per section 56(2)(x));
-
is an income (as per section 2(24)(xviia));
-
which is deemed to have accrued or arisen in India as per section 9(1)(i);
and, therefore taxable in India.
Thus, the proposal in FB No. 2 and Amendment thereto does not change the taxability of income arising from any property situated in India and/or through the transfer of a capital asset situate in India.
However, the existing provision for exempting gifts as provided in proviso to section 56(2)(x) of the Act will continue to apply for such gifts. Thus, a gift of sum of money from resident father to a non-resident son/daughter will continue to be non-taxable but a gift of sum of money outside India from a resident to a non-resident friend will now be covered under taxable income in India of the non-resident friend.
This amendment is effective from 1st April, 2020 and will accordingly apply in relation to assessment year 2020-21 and subsequent assessment years.
2. Exemption to Category III AIF on transfer of capital asset [Section 10(4D), 47(viiab)]:
Under the existing provisions of the section 47 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 recognized stock exchange located in any International Financial Services Centre (IFSC) and where the consideration for such transaction is paid or payable in foreign currency shall not be regarded as transfer.
With a view to provide tax-neutral transfer of certain securities by Category III Alternative Investment Fund (AIF) in IFSC, it was 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 was also 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.
The Amendment to FB No. 2 shifted the exemption of gains on transfer of such assets by inserting new clause 10(4D) in the Act and removing the changes proposed by FB No. 2. This amendment provides an exemption u/s 10(4D) of the Act for any income earned by Category III AIFs on transfer of specified securities on a recognised stock exchange in an IFSC where the consideration is in convertible foreign exchange to the extent the income relates to units held by NRs. Thus, the transfer of capital asset by Category III AIFs shall now be treated as transfer for the purposes of capital gain, but the income of such AIF arising out of such transfer shall be exempt from tax u/s 10(4D) of the Act.
This amendment is effective from 1st April, 2020 and will accordingly apply in relation to assessment year 2020-21 and subsequent assessment years.
3. Compliance of Other laws before granting exemption under Section 10(23C):
Section 12AA of the Act prescribes for manner of granting registration in case of trust or institution for the purpose of availing exemption in respect of its income under section 11 of the Act, subject to conditions contained under sections 11, 12, 12AA and 13 of the Act. Section 12AA of the Act also provides for manner of cancellation of said registration.
The earlier provision of section 12AA of the Act did not require the Principal CIT or CIT to satisfy himself about the compliance of trust or institution to requirements of any other law.
To ensure that the trust or institution do not deviate from their objects, Finance (No 2) Act, 2019 amended section 12AA of the Act, to provide that:
(i) at the time of granting the registration to a trust or institution, the Principal Commissioner or the Commissioner shall, inter alia, also satisfy himself about the compliance of the trust or institution to requirements of any other law which is material for the purpose of achieving its objects;
(ii) where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A of the Act and subsequently it is noticed that the trust or institution has violated requirements of any other law which was material for the purpose of achieving its objects, and the order, direction or decree, by whatever name called, holding that such violation has occurred, has either not been disputed or has attained finality, the Principal Commissioner or Commissioner may, by an order in writing, cancel the registration of such trust or institution after affording a reasonable opportunity of being heard.
By Amendment to FB No. 2, the additional condition inserted in Section 12AA of the Act in relation to grant and cancellation of registration is incorporated in section 10(23C) of the Act also.
Accordingly, provisos to clause (iv), (v), (vi), (via) of section 10(23C) of the Act allowing exemption to fund, trust, institutions, university, other educational university, hospital and any medical institution are amended.
This amendment now clarifies that the exemption would be available only where the prescribed authority is satisfied that the other laws are also complied with. Additionally, the exemption may be withdrawn where such conditions are not fulfilled.
These amendments are effective from 1st September, 2019.
4. Start ups – Angel Tax chargeable for non compliance of Notification [Section 56 (2) (viib) and 270A]:
The word “Start-Ups” and “Angel Tax” are talk of the town today. Everyday newspapers have something or other to talk about “start-ups” and “Angel tax”.
The existing provisions of the said section 56(2)(viib) of the Act, 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, the Central Government is empowered to notify that the provisions of this section shall not be applicable to consideration received by a notified company.
The DPIIT had issued a Notification No. 127(E), dated 19th February, 2019, allowing the exemption from angel tax under section 56(2)(viib) of the Act and to allow the deductions under section 80-IAC of the Act to the start ups. The exemption under this notification is allowed if start up fulfils the prescribed conditions, which includes-
(a) Company does not invest in specified assets such as share and securities,
(b) Purchase of motor vehicle of value of more than ₹ 10 lakhs, etc.
With a view to ensure compliance to the conditions specified in the notification, it was proposed in FB No. 2 to provide that in case of failure to comply with the conditions, the consideration received for issue of shares which exceeds the face value of such shares shall be deemed to be the income of the company chargeable to income-tax for the previous year in which the failure to comply with any of the said conditions has taken place.
The objective of this sub-section (viib) of section 56(2) of the Act was to tax the excess premium over the fair market value of shares. While making the proposal it was stated that in case any of the condition of the notification is violated, the amount in excess of face value will be taxable. What is taxable is the amount in excess of FMV and not in excess of face value.
This has now been corrected by Amending the FB No. 2 and also penalty has now been prescribed for violation.
Proposal as per FB No. 2 |
Amendment to Proposal of FB No. 2, which is passed by Lok Sabha |
After the proviso, the following proviso shall be inserted, namely:—
“Provided further that where the provisions of this clause have |
“Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in |
not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place.”; |
the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has underreported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year. |
Thus, it is now provided that –
If a company after fulfilling the conditions of DPIIT’s notification fails to comply with any of the conditions mentioned therein, then the difference between the issue price of the shares and fair market value of such shares shall be deemed as income of the company of the previous year in which such failure takes place. Hence, the Angel tax shall be levied on the difference between the issue price of shares and the Fair Market Value of shares and not the Face Value of shares.
Further, it is now provided that when the exemption is withdrawn, it shall be deemed that the company has misreported the said income and, consequently, a penalty of an amount equal to 200% of tax payable on the underreported income (i.e., difference between issue price and fair market value of shares) shall be levied as per section 270A of the Act.
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.
5. Exemption from Dividend Tax to Mutual Funds located in IFSC [Section 115 R]:
The existing provisions of 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.
In order to incentivize relocation of Mutual Fund in IFSC, it was 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 and the term Specified Mutual Fund was defined.
The following amendment has been made to FB No. 2
Proposal as per FB No. 2 |
Amendment to Proposal of FB No. 2, which is passed by Lok Sabha |
After the second proviso, before the Explanation, the following proviso shall be inserted, namely:—
“Provided also that no additional income-tax |
After the second proviso, before the Explanation, the following proviso shall be inserted, namely:—
“Provided also 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, out of its income derived from transactions made on a recognised stock exchange located in any International Financial Services Centre:”; |
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, out of its income derived from transactions made on a recognised stock exchange located in any ‘International Financial Services Centre and where the consideration for such transaction is paid or payable in convertible foreign exchange.” |
Thus, the Specified MF will now be entitled to exemption from payment of additional income-tax on distribution of income, when it complies with following conditions –
i) income is distributed out of income derived from the transactions made on recognised stock exchange located in IFSC.
ii) the consideration for such transaction should be paid / payable in convertible foreign exchange.
iii) all units of Mutual Funds are held by non-residents.
This amendment will take effect, from 1st September, 2019.
6. TDS on payment by individual / HUF on Commission or Brokerage [Section 194M]:
Earlier, there was no requirement for an individual or HUF to deduct tax at source on payments made to a resident contractor or professional when it is for personal use, or if the individual or HUF is not subjected to audit for his business or profession.
The FB No. 2 proposed to insert a new section 194M in the Act making it obligatory for such individual or HUF to deduct tax at source at the rate of five per cent if the annual payment made to a contractor or professional exceeds ₹ 50 lakhs.
It was also proposed that a person deducting tax under this section shall be able to deposit TDS on the basis of the Permanent Account Number (PAN) only and also eligible to file an application u/s 197 of the Act for issue of certificate for nil or lower rate of TDS.
The Amendment to FB No. 2 has extended the scope of section 194M of the Act to levy TDS on commission (not being insurance commission referred to in section 194 D) and brokerage.
The threshold of ₹ 50 lakhs continues to apply.
Thus, now an individual or HUF who will utilize the services of a resident –
-
Contractor; or
-
Professional; or
-
Agent;
for –
will be liable to deduct and pay TDS at the rate of 5%, if the threshold exceeds ₹ 50 lakhs.
This amendment will take effect from 1st September, 2019.
7. TDS on cash withdrawal from banks [Section 194N and section 198]:
In order to discourage large amount of cash withdrawal from bank accounts, it was proposed in FB No. 2 to provide for tax deduction at source at the rate of 2% on cash withdrawal by a person in excess of ₹ 1 crore in a year from his bank account.
Some business models, where large cash withdrawal is a necessity, are proposed to be exempted.
It is also proposed that the Central Government may notify the persons to whom these provisions shall not be applicable in consultation with the Reserve Bank of India.
Implementation of proposal raised certain practical issues, such as –
i) Whether this limit of ₹ 1cr is per account or cumulative for all accounts operated by a person,
ii) Tax is deductible from an income, so whether amount withdrawn from bank is to be treated as income of the Tax payer (section 198 of the Act).
These issues has been addressed by the Amendment to FB No. 2, as under –
Proposal as per FB No. 2 |
Amendment to Proposal of FB No. 2, which is passed by Lok Sabha |
Every person, being,–– |
Every person, being,–– |
(i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act); |
(i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act); |
(ii) a co-operative society engaged in carrying on the business of banking; or |
(ii) a co-operative society engaged in carrying on the business of banking; or |
(iii) a post office,
who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from an account maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of sum exceeding one crore rupees, as income-tax: |
(iii) a post office,
who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from an account from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of sum exceeding one crore rupees, as income-tax:
Further following proviso is inserted with effect from 1st September, 2019 in section 198 of the Act.
“Provided further that the sum deducted in accordance with the provisions of section 194N for the purpose of computing the income of an assessee, shall not be deemed to be income received.” |
The literal interpretation of this amendment as proposed in the FB No. 2 was that the threshold of ₹ 1 crore was to be calculated account wise (i.e., for each account maintained by an assessee) with a Payer as referred above. Now through the Amendment to FB No. 2, it is clarified that the threshold of ₹ 1 crore is to be calculated for all the accounts maintained by an assessee with a Payer as referred above (i.e. threshold of ₹ 1 crore is to be calculated payerwise).
Trust the above interpretation is held to be correct and the interpretation is not stretched to cover cash withdrawals from all the accounts maintained with all the Payers cumulatively, to consider the threshold of ₹ 1 crore.
This is not a levy of tax, it is just a TDS, for which an assessee will get credit in his/her/its Return. So basically it is a cash flow issue. However, no corresponding amendment has been made in Section 199 of the Act which gives the assessee, a right to claim the credit for tax deducted at source. Thus, there is an ambiguity regarding the same. It is expected that the same will be corrected by way of Notification.
The practical issues which the assessees are going to face are that during the course of assessment proceedings, the assessee will have to reconcile such cash withdrawn from the accounts with its books of account and going forward may have to produce its cash book to show utilization of every penny of cash withdrawn.
The amendment is effective from 1st September, 2019.
As stated in the beginning, the FB No. 2 along with Amendment to FB No. 2 is enacted on 1st August, 2019 and now it is part of the Income Tax Act, 1961 and accordingly respective amendments are effective from the date specified therein.
Also, there was one proposal in FB No. 2 (now enacted) which has been point of discussion from day one, i.e. high rate of surcharge on super rich. No Amendment has been made in FB No. 2 in respect of the same. Earlier, the view was that the Government will not reconsider the same presently and will deal with it as and when issues are faced. However, the issue is being reconsidered for FPIs and some relaxation by way of notification is expected soon.
As per newspaper report, the draft of Direct Tax Code (DTC) is ready and it should be presented and available in public domain for understanding, debating and representation soon. Let’s hope for the Best.