Hon’ble Finance Minister has presented her second Union Budget 2020-21. The Union Budget centers around three ideas — Aspirational India, Economic development and a Caring Society. Expectations from the Budget for 2020-21 were running high amidst economic slowdown, slowdown in growth, a steep fall in investment rate and a stressed financial system has consequential effect on the economy. Hence lot of expectations. The budget is well intentioned but, appears to be overambitious in achieving budgetary collection and growth targets.
As usual, several changes have been proposed for Direct Tax such as new income-tax slabs proposing lower rates, removal of dividend distribution tax in the hands of companies and taxing the same in hands of recipients, expanding scope of TCS on liberalised remittance etc. Some of the changes proposed are procedural while some are trivial in nature. Making frequent changes in the direct tax every year including procedural changes makes income-tax more compliance based and complex rather than simplifying it. The changes suggested should be more broad based and principle oriented rather than procedure oriented.
Some of the changes proposed in the Income Tax Act 1961, (“the Act”) relating to incentives are given below. Some of the clauses or sections proposed in Finance Bill pertaining to some of the incentives are clubbed together to have a better understanding of the subject or amendments proposed.
1. Amendments related to business trusts [2(13A), 10(23FC), 10(23FD) 115UA, 194LBA]
(i) Amendment to definition of the term “business trust” – Clause 3(i) corresponding to section 2(13A):
• Definition of the term “business trust” is provided in section 2(13A) of the Act which covers trust registered as Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) under the Securities and Exchange Board of India Regulations, 2014 and units of such trusts are required to be listed on a recognized stock exchange in India. Presently, business trust covers only InvITs or REITs whose units are listed on a recognised stock exchange and does not cover the private unlisted InvITs and REITs.
• India’s capital market regulator, the Securities and Exchange Board of India (SEBI) notified the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations) and the SEBI (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) in September 2014 with a view to increase investor participation in the infrastructure and real estate sector. The Government of India also introduced a tax regime applicable to InvITs and REITs in the Finance Act, 2014 defining them together as ‘Business Trusts’ under the Act.
• The Finance Bill 2020 now proposes to do away with mandatory listing requirements of InvITs and REITs. As a result, now all the private unlisted InvITs and REITs will also fall within the definition of Business Trust.
• Securities and Exchange Board of India (Infrastructure Investment Trusts) (Amendment) (Regulations), 2019 vide notification No.SEBI/LAD-NRO/GN/2019/10 has, inter alia done away with the mandatory listing requirement for InvITs. In Budget 2020, an amendment has been proposed to align with the SEBI notification thereby giving the benefit to unlisted InvITs. This move will benefit private unlisted InvITs and REITs to increase the investor access.
• Due to proposed amendment in the definition of business trust covering within its ambit the private unlisted InvITs and REITs will put them at par with listed InvITs and REITs. As a result such unlisted InvITs and REITs of a business trust will be able to get the benefit of exemption from income by way of dividend, rent and interest and the distribution of such income will be taxed only in the hands of the unit holders on distribution subject to the TDS provisions.
• Such amendment shall come in force from 01.04.2021.
(ii) Taxation of dividend income in the hands of business trust – Clause 7(II)(b) Section 10(23FC):
• The provision of section 10(23FC) of the Act states that any income of a business trust by way of:
(a) interest received or receivable from a special vehicle or
(b) dividend referred to in section 115-O(7) of the Act shall not be included in its total income.
• Finance Bill 2020 proposes to replace existing clause (b) in view of proposal to remove dividend distribution tax as provided in section 115-O of the Act, by clause “dividend received or receivable from the special purpose vehicle” and such dividend income shall now be considered as an exempt income.
• Such amendment shall come in force from 01.04.2021.
(iii) Taxation of dividend in the hands of the unit holders – Clause 62 corresponding to section 115UA:
• Section 115UA of the Act provides for a taxation regime applicable to business trusts. Under the said regime, the total income of the trust, excluding capital gains income is charged at the maximum marginal rate. Further, the income by way of interest and rent, received by the business trust from a Special Purpose Vehicle (SPV) is accorded a pass through treatment i.e. there is no taxation of such interest or rental income in the hands of the trust and no withholding tax at the level of SPV.
• Presently, as per section 115UA r.w.s. 10(23FC)(a) of the Act, only interest income is taxable in the hands of the unit holders whereas the dividend income is exempt.
• The dividend distribution by the business trust will now be taxable in the hands of the unit holders .
• In view of the abolition of dividend distribution tax proposed in the Finance Bill 2020, reference to clause (a) of section 10(23FC) of the Act made in section 115UA of the Act has now been proposed to be deleted and as a result dividends received by a business trust from a SPV is proposed to be taxed in the hands of unit holder.
• Such amendment shall come in force from 01.04.2021.
(iv) Exemption of distributed income received by unit holder – Clause 7(II)(c) Section 10(23FD)
• Presently, any distributed income being dividend received by a unit holder from business trust is exempt as per section 10(23FD) of the Act.
• The Finance Bill 2020 proposes to remove such dividend income from being exempt under section 10(23FD) of the Act thereby making it taxable in the hands of the unit holders as stated above.
• Such amendment shall come in force from 01.04.2021.
(v) Withholding tax on the distribution of dividend by business trust – Clause 81 corresponding to section 194LBA:
• Presently, business trusts are required to deduct tax at source only in respect of interest and rental income distributed to unit holders as per section 194LBA of the Act. Dividend income distributed to unit holders was not subject to TDS provisions.
• Now as per the proposed amendment in Finance Bill 2020, tax is required to be deducted at source at 10% on distribution of dividend income to the resident and non resident unit holders by such business trust.
• Such amendment shall come in force from 01.04.2020.
• Presently listed InvITs and REITs of Business trusts in India has a single level of tax i.e. the corporate tax paid by the SPVs owning the assets and the rest of the chain being tax exempt. These provisions are similar to the global standards. The SPVs paid tax only on their annuity income — rents, tolls, etc. and hence there is only a single point of taxation.
• The plan to amend the tax treatment of dividend income received by unit holders of these instruments is likely to create two levels of taxation. This may jeopardise new fundraising plans of domestic infrastructure and real estate companies. Further, the unit holders receiving the dividend will now end up paying income tax and to that extent it neutralizes the effect of the benefit of reduced income tax rates proposed for individuals in the Finance Bill 2020.
2. Income of Mutual funds – Section 10(23D), Clause 7(II)(a) of Finance Bill 2020
• Section 10(23D) of the Act currently provides an exemption to income of mutual fund companies subject to payment of additional tax on any income distributed by it to the unit holders in accordance with section 115R of the Act. Hence, income of a mutual fund was subject to additional tax on distribution of income to unit holders as given in Chapter XII-E i.e. section 115R.
• The Finance Bill 2020 proposes to delete the reference to additional tax on distribution of income to unit holders as given in Chapter XII-E in view of the proposed amendment for levy of income-tax on distribution of income by the mutual fund in the hands of unit holders.
• The provision of section 115R of the Act, which provides for additional tax payable by a mutual fund company on distribution of income to its unit holders and also section 10(35) of the Act which provides for exemption of income in the hands of unit holder distributed by mutual fund, are now proposed to be deleted. As a result the income will be taxed in the hands of unit holders and to that extent it neutralizes the effect of the benefit of reduced income tax rates proposed for individuals in the Finance Bill 2020. Hence in section 10(23D), the reference to chapter XII-E is proposed to be removed.
• Such amendment is consequential in nature and shall come in force from 01.04.2021.
3. Exemption in respect of certain income of wholly owned subsidiary of Abu Dhabi Investment Authority and Sovereign Wealth Fund – Insertion of new clause (23FE) in section 10 of the Act.(Clause 7(II)(d)):
• New clause is proposed to be inserted after clause (23FD) in section 10 of the Act which is reproduced herein below:
‘(23FE) any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or equity, if the investment–
(i) is made on or before the 31st day of March, 2024;
(ii) is held for at least three years; and
(iii) is in a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA or such other business as the Central Government may, by notification in the Official Gazette, specify in this behalf.
Explanation.—For the purposes of this clause, “specified person” means––
(a) a wholly owned subsidiary of the Abu Dhabi Investment Authority which––
(i) is a resident of the United Arab Emirates; and
(ii) makes investment, directly or indirectly, out of the fund owned by the Government of the United Arab Emirates;
(b) a sovereign wealth fund which satisfies the following conditions, namely:––
(i) it is wholly owned and controlled, directly or indirectly, by the Government of a foreign country;
(ii) it is set up and regulated under the law of such foreign country;
(iii) the earnings of the said fund are credited either to the account of the Government of that foreign country or to any other account designated by that Government so that no portion of the earnings inures any benefit to any private person;
(iv) the asset of the said fund vests in the Government of such foreign country upon dissolution;
(v) it does not undertake any commercial activity whether within or outside India; and
(vi) it is specified by the Central Government, by notification in the Official Gazette, for this purpose;
• As per the proposed clause if any investment is made by specified persons in a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating or maintaining any infrastructure facility as defined in Explanation to section 80-IA(4)(i) of the Act or such other business as may be notified by the Central Government in this behalf, then income of such persons in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India in the form of debt or equity subject to fulfillment of conditions will be exempt from income tax.
• The meaning of ‘specified person’ has been provided in the said clause as:
• A wholly owned subsidiary of Abu Dhabi Investment Authority which –
a. is a resident of the United Arab Emirates (UAE) and
b. makes investment directly or indirectly out of the fund owned by the Government of the UAE;
• A sovereign wealth fund which satisfies the following conditions, namely:
a. it is wholly owned and controlled, directly or indirectly, by the Government of a foreign country;
b. it is set up and regulated under the law of such foreign country;
c. the earnings of the said fund are credited either to the account of the Government of that foreign country or to any other account designated by that Government so that no portion of the earnings inures any benefit to any private person;
d. the asset of the said fund vests in the Government of such foreign country upon dissolution;
e. it does not undertake any commercial activity whether within or outside India; and
f. it is specified by the Central Government, by notification in the Official Gazette, for this purpose;’;
• In order to be eligible for exemption, the investment is required to be made on or before 31st March, 2024 and is required to be held for at least three years.
• Rationale for introduction of the above clause is to promote investment of sovereign wealth fund/ Foreign Investments in infrastructure facilities. Sovereign wealth funds (SWFs) already have a presence in India’s renewables, hydro, transmission and distribution sectors and the 100% tax exemption on interest, dividend and capital gains will be a huge positive for them. This proposed amendment will help in tapping the sovereign funds and boost the investment in infrastructure.
• Such amendment shall come in force from 01.04.2021.
4. Exemption for crude oil company – Clause 7(III) corresponding to section 10(48C)
• Clause (48A) of section 10 of the Act provides for an exemption to income accruing or arising to a foreign company on account of storage of crude oil facility in India and sale of crude oil there from to any person resident in India and (48B) of section 10 of the Act provides for exemption in respect of any income accruing or arising to a foreign company on account of sale of leftover stock of crude oil after the expiry of agreement.
• Finance Bill 2020 proposes to insert new clause after clause (48B) in section 10 of the Act.
• It is proposed to provide exemption, to any income accruing or arising to Indian Strategic Petroleum Reserves Limited (ISPRL), being a wholly owned subsidiary of Oil Industry Development Board under the Ministry of Petroleum and Natural Gas, as a result of an arrangement for replenishment of crude oil stored in its storage facility in pursuance to directions of the Central Government in this behalf.
• This exemption shall be subject to the condition that the crude oil is replenished in the storage facility within three years from the end of the financial year in which the crude oil was removed from the storage facility for the first time.
• Such amendment will take effect from the 1st day of April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
5. Report by an accountant for claiming exemption – Clause 8 corresponding to section 10A
• Section 10A of the Act provides for deduction of profits and gains derived by an undertaking from the export of articles or things or computer software subject to the conditions prescribed therewith.
• One of the conditions for claiming such deduction provided in section 10A(5) of the Act is that assessee should furnish the prescribed form 56F i.e. a report of the Chartered Accountant along with the return of income .
• Under section 44AB of the Act, every person carrying on business is required to get his accounts audited, if his total sales, turnover or gross receipts, in business exceed or exceeds one crore rupees in any previous year. In case of a person carrying on profession he is required to get his accounts audited, if his gross receipts in profession exceeds fifty lakh rupees in any previous year. The Finance Bill 2020 has proposed an amendment to section 44AB of the Act whereby the tax audit report will now be required to be furnished by the said assessee at least one month prior to the due date of filing of return of income and not along with furnishing return of income. The amendment has been proposed so as to enable pre-filling of returns in case of persons having income from business or profession.
• Hence, consequential amendment has been proposed in section 10A(5) of the Act whereby, the Chartered Accountant is required to submit his report in specified form one month before filing of return of income i.e on or before 30th September and not along with the furnishing return of Income before its due date which is now proposed to be 31st October in such cases..
• Such amendment will take effect from the 1st day of April, 2020 and will, accordingly, apply in relation to the Assessment Year 2020-2021 and subsequent assessment years.
6. Carry forward and set off of losses in certain cases – Clause 31 corresponding to section72AA:
• Section 72AA of the Act provides for carry forward of accumulated losses and unabsorbed depreciation allowance in the case of amalgamation of banking company with any other banking institution under a scheme sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of the Banking Regulation Act, 1949. This section operates notwithstanding anything contained in sub-clause (i) to (iii) of clause (1B) of section 2 or section 72A of the Act.
• In order to address the issue faced by the amalgamated public sector banks and public sector General Insurance Companies, it is now proposed to extend the benefit of this section to amalgamation of,-
(i) one or more corresponding new bank or banks with any other corresponding new bank under a scheme brought into force by the Central Government under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or both, as the case may be, or
(ii) one or more Government company or companies with any other Government company under a scheme sanctioned and brought into force by the Central Government under section 16 of the General Insurance Business (Nationalisation) Act, 1972.
• “Corresponding new bank” is proposed to be given the meaning as assigned to it in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or clause (b) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
• “Government company” is proposed to be given the meaning assigned to it in section 2(45) of the Companies Act, 2013. In addition, it is to be engaged in the general insurance business and has come into existence by operation of section 4 or section 5 or section 16 of the General Insurance Business (Nationalisation) Act, 1972.
• “General insurance business” is proposed to be given the meaning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972.
• 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.
7. Deduction for interest on loan taken for certain house property – section 80EEA -Clause 32:
• Section 80EEA of the Act was inserted by Finance Act 2019 allowing deduction of interest up to Rs. 1,50,000/- on loan taken from financial institution for acquisition of affordable residential house property.
• One of the conditions for claiming such deduction is that, such loan has been sanctioned by the financial institution during the period from 01.04.2019 to 31.03.2020. The Finance Bill 2020 proposes extension of period for sanctioning of loan by financial institution to 31.03.2021 for acquisition of affordable residential house property
• Such a proposal is aimed to incentivise first time buyers to invest in residential house property whose stamp duty does not exceed forty-five lakh rupees.
• Such deduction is applicable only if an asseessee opts for taxation as per old regime and assessee is not entitled to such deduction if he opts for reduced tax rates without claiming any deduction as proposed in Finance Bill 2020.
• Considering the proposed reduced rate of Income Tax in Finance Bill 2020 for individuals, such amendment may not offer any benefit or incentive to those who want to acquire affordable residential house property and buying of affordable house will have to be considered independently without any tax benefits.
• Such amendment will take effect from the 1st day of April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
8. Lower tax rate for certain companies – Clause 52 corresponding to section 115BAB:
• Taxation Law Amendment Act, 2019 introduced a new section 115BAB to promote manufacturing activity where a concessional tax rate of 15% has been allowed to companies set-up and registered on or after 01.10.2019 which commence manufacturing or production of an article or thing latest by 31.03.2023.
• Finance Bill 2020 proposes to extend such beneficial tax rate to companies engaged in business of generation of electricity.
• Such amendment proposed will put electricity generating company at par with companies manufacturing or producing an article or a thing.
9. TDS on professional fees – Clause 79 corresponding to section 194J
• Section 194J of the Act states that any person not being an individual or HUF who is responsible for paying to a resident any sum of the following nature exceeding ₹ 30,000/- has to deduct tax at source at the rate of 10% of such sum:
a. fees for professional services or
b. fees for technical services or
c. any remuneration or fees or commission payable to a director of a company or
d. royalty or
e. any sum referred to in section 28(va) of the Act
• Section 194C of the Act provides that any person responsible for paying any sum to a resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract shall at the time of payment or credit of such sum deduct an amount equal to one per cent in case payment is made to an individual or a HUF and two per cent in other cases.
• The Finance Bill 2020 proposes a reduced rate of 2% for fees for technical services (other than professional services) from existing 10%.
• There were large number of litigations treating assessee in default for short deduction of tax where assessee had considered payment to a person for technical services as payment in pursuance of a contract and thereby deducted tax at the rate of 2%. On the other hand the Income Tax Department was of the view that tax was required to be deducted for such payments at the rate of 10% under 194J instead of 2% under 194C. In order to put such litigations to rest, an amendment is proposed in the current finance bill where the rate for payments in the nature of fees for technical services has been revised at 2% instead of higher rate of 10%.
• It is to be noted that many litigations are on account of short deduction of TDS and hence it is suggested that one uniform rate should be considered for TDS purpose which will further reduce litigation and will also result in simplification of TDS provisions.
• Such amendment shall come in force from 01.04.2020.
10. Expenditure on scientific research -Section 35 Clause 17:
• Section 35 of the Act provides for deduction of expenditures on scientific research, including any sums paid to an approved research association, university, college, another institution, or a company.
• Under the current provisions, even if the approval granted to any of the entities (mentioned above, excluding a company) is withdrawn, the taxpayer is still allowed a deduction under section 35 of the Act, if payment to such entity has been made before the withdrawal of such approval.
• A similar provision is now being proposed for granting deduction to taxpayers if the payment to company has been made before of withdrawal of approval granted to a company.
• It is proposed to insert a fifth proviso to said section 35(1) of the Act requiring above-mentioned entities to submit an intimation within the three months from the date of said proviso coming into effect. Subject to such compliances, its approval shall be deemed to be valid for another five years.
• It is also proposed that approvals granted in future shall, at any one time, have effect for such years, not exceeding five assessment years as may be specified in the notification.
• It is also proposed that the entities mentioned above shall − prepare and deliver statements to the income tax authority; and furnish to the donor, a certificate specifying the amount of donation in such manner, containing such particulars and within such time from the date of receipt of sum, as may be prescribed.
• The rationale as mentioned in memorandum explaining proposed amendments is that the approval or registration or notification for exemption should also be for a limited period, say for a period not exceeding five years at one time, which would act as check to ensure that the conditions of approval or registration or notification are adhered to for want of continuance of exemption. This would in fact also be a reason for having a non-adversarial regime and not conducting roving inquiry in the affairs of the exempt entities on day to day basis, in general, as in any case they would be revisiting the concerned authorities for new registration before expiry of the period of exemption. This new process needs to be provided for both existing and new exempt entities.
• However, such amendments lead to frequent compliances by such entities. In many cases such entities are non-profit making organization and do not have wherewithal to do such compliances. It is to be noted that during the assessment proceedings, assessing officer has power to recommend for withdrawal of notification or exemptions where he notices misuse of such notification or exemptions. Now such entities are subjected to multilayer scrutiny. Such provisions will only lead to red tapism.
• These amendments are proposed to be applicable from 1st June 2020.