Dr. K. Shivaram, Senior Advocate & Shashi Bekal, Advocate
The Finance Bill, 2023 has 122 clauses proposing various amendments to the Income-tax Act, 1961 (Act). The Article aims at providing a bird’s eye view of certain important direct tax proposals contained in the Finance Bill, 2023. An attempt has been made in this article to critically evaluate certain provisions and their implications.
Table of Contents
- Introduction of the Union Budget, 2023
- Proposals in the Finance Bill, 2023
- Promoting timely payments to Micro and Small Enterprises
- Increasing threshold limits for presumptive taxation schemes
- The increasing rate of Tax Collected at the Source (TCS) of certain remittances
- Limiting the rollover benefit claimed under section 54 and section 54F of the Act
- Introduction of the authority of Joint Commissioner (Appeals)
- Bringing the non-resident investors within the ambit of section 56(2)(viib) of the Act to eliminate the possibility of tax avoidance
- Extending deeming provision under section 9 of the Act to gift to not-ordinarily resident
- Rationalisation of the provisions of Charitable Trust and Institutions
- Defining the cost of acquisition in case of certain assets for computing capital gains
- Introduction of the Union Budget, 2023
The Honourable Mrs. Nirmala Sitharaman, Union Finance Minister presented the budget on February 01, 2023, and subsequently the Finance Bill, 2013 (2023) 451 ITR 1 (St), Notes on Clauses (2023) 451 ITR 156 (St) and the Memorandum explaining the provisions in the Finance Bill, 2023 (2023) 451 ITR 226 (St).
As our Nation enters Amrit Kaal, the Budget lays down a vision for 2047, to be a superpower, when we celebrate 100 years of Independence. In the last nine years of the current administration, the Indian economy has increased in size from being 10th to 5th largest in the world. The per capita income has more than doubled to Rs. 1.97 lahks.
Over the last few years, Our Nation gained ground in the field of technology and digitalization. The strives were leveraged during the pandemic-induced lockdown when Courts were functioning online through video conferencing. The Hon’ble Supreme Court have suo moto held hearings and provided several clarifications to not disturb the efficient functioning of the judiciary or upset its stakeholders. The Hon’ble Income-tax
Appellate Tribunal performed the remarkable task of lowering the pendency to a historic low by disposing of several cases through virtual hearings. On the occasion of the 72nd Independence Day celebrations, the Hon’ble Prime Minster of India Shri Narendra Modi addressed the occasion by putting forward a new Indian vision and road map for the Nation. The All India Federation of Tax Practitioners had made an appeal for separate allocation of funds for the judiciary for speedy disposal of justice. It is commendable to know that Rs. 7,000/- Crores has been allotted for phase-3 of e-courts for the efficient administration of justice.
For enhancing the ease of doing business, more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized. For furthering trust-based governance the Jan Vishwas Bill proposes to amend 42 Central Acts. This Budget proposes a series of measures to unleash the potential of the economy.
On account of digitalisation leading to faceless assessment and faceless appeals, it has become essential for tax practitioners to know the law and procedure for better compliance and representation. An in-depth discussion of the Finance Bill will help tax practitioners to understand the law and procedure.
- Proposals in the Finance Bill, 2023
- Promoting timely payments to Micro and Small Enterprises [Clause 13] (2023) 451 ITR 70 (St)
Micro, Small and Medium Enterprises (MSME) are the backbone of a developing economy. To promote their development, the Budget has proposed several changes such as the extension of the credit guarantee scheme, Vivad Se Vishwas, Entity level Digi locker et cetera.
To promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Act.
Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, the proposed amendment to section 43B of the Act will allow the payment as a deduction only on a payment basis. It can be allowed on an accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
A few scenarios emerge from this proposed amendment:
- Payments are made within the period prescribed under the MSMED Act
The expense will be allowed as an expense.
- Payments are made after the due at as per the MSMED Act but before the end of the financial year.
The expense will be allowed as an expense on an actual basis under section 37 of the Act.
It is pertinent to note that the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd.
v. CIT (2022) 448 ITR 518/143 taxmann.com 178 (SC) where, inter alia, it was held that for the claim of deduction of payments, the same has to be made within the timeline prescribed in the special statute.
It is desired that the Central Board of Direct Taxes (CBDT) may clarify the claim for deduction under section 37 of the Act to avoid unnecessary litigation.
- Payments are made within the period prescribed under the MSMED Act but in the next financial year.
The expense will be an expense on an accrual basis and will be allowed in the financial year.
- Payments are made after the due at as per the MSMED Act and after the end of the financial year.
The expense will be allowed in the year in which the actual payment is made.
The Auditors will have to keep this new provision in mind while preparing the Tax Audit Reports.
According to the Memorandum explaining the provisions of the Finance Bill of 2013, it appears that the Government intends to improve liquidity and cash inflows of MSMEs. A few considerations need to be considered and clarified to avoid unintended litigation and achieve the intention of the legislature.
Firstly, the provision should be made applicable to only registered MSMEs. Secondly, the provisions should not be made applicable to an MSME making payments to other MSMEs. Thirdly, the claim of expenses on an actual basis if the payment is made after the time prescribed under the MSMED Act but during the financial year. Lastly, the interest paid to MSMEs on delayed payment being compensatory and not penal in nature should be allowed as a deduction on a payment basis.
- Payments are made within the period prescribed under the MSMED Act
- Increasing threshold limits for presumptive taxation schemes [Clauses 15, 16 and 17] (2023) 451 ITR 72 (St)
One of the expectations of taxpayers is always ease of compliance. On the other hand, the Government is promoting cashless transactions. This proposed amendment has hit two birds with one stone.
The proposed amendment provides for an increase in the threshold for presumptive income for eligible businesses under section 44AD of the Act from Rs. 2 crores to Rs. 3 crores; and for professionals under section 44ADA of the Act from Rs. 50 lakhs to Rs. 75 lakhs.
This enhancement is applicable where the amount or aggregate of the amounts received during the previous year, in cash, do not exceed five per cent of the total turnover or gross receipts.
It is pertinent to note that the Department on their website (https://incometaxindia.gov.in/ news/finance-bill-2023-highlights.pdf) have interpreted this provision to include payments as well i.e., 95 per cent of the receipts and payments have to be through a non-cash mode. This is not as per the Finance Bill, 2023 or the Memorandum explaining the provisions of the Finance Bill, 2023. This difference is interpretation could lead to unintended litigations.
Overall, this is a welcoming amendment as it will reduce compliance costs for taxpayers and reduce cash transactions.
- The increasing rate of Tax Collected at the Source (TCS) of certain remittances [Clause 90] (2023) 451 ITR 100 (St)
The Finance Act, 2020 (2020) 428 ITR 1 (St) proposed to levy TCS on remittances made on account of Liberalized Remittance Scheme (LRS).
The Finance Bill, 2023, proposed to increase the rate of TCS on overseas tour packages (from 5 per cent above Rs. 7,00,000/-) to 20 per cent without any threshold, and for other cases any other case at 20 per cent.
The LRS is made under the Foreign Exchange Management Act, 1999 (FEMA) to allow all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000/- per financial year. The Scheme was introduced on February 4, 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. According to LRS, Individuals can avail of foreign exchange facilities for the following purposes:
- Private visits to any country (except Nepal and Bhutan)
- Gift or donation
- Going abroad for employment
- Maintenance of close relatives abroad
- Travel for business, attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as an attendant to a patient going abroad for medical treatment/ check-up
- Expenses in connection with medical treatment abroad
- Studies abroad
- Any other current account transaction which is not covered under the definition of a current account in FEMA 1999.
Although the Memorandum to the Finance Bill, 2020 (2020) 420 ITR 326 (360) (St) and Notes to clauses to the Finance Bill, 2020 (2020)_420 ITR 249 (315) (St) are silent about the intention of the legislature in introducing TCS to LRS transactions.
The Finance Minister during the Union Budget 2023 has stated that the country offers an immense attraction for domestic as well as foreign tourists. And that there is a large potential to be tapped into tourism. The Government plans on improving eco-tourism through Amrit Dharohar. Further, the Budget 2023 has stated that with an integrated and innovative approach, at least 50 destinations will be selected through challenge mode where aspects such as physical connectivity, virtual connectivity, tourist guides, high standards for food streets and tourists security, all the relevant aspects would be made available on an App to enhance the tourist experience. Every destination would be developed as a complete package. The focus of the development of tourism would be on domestic as well as foreign tourists. Sector-specific skilling and entrepreneurship
development will be dovetailed to achieve the objectives of the ‘Dekho Apna Desh’ initiative. This was launched as an appeal by the Prime Minister to the middle class to prefer domestic tourism over international tourism. The intention of the Government for the increase in the TCS rates on overseas tour packages is to discourage foreign travel and prefer domestic tourism. This is a welcoming provision and in line with the Government’s intentions and policies.
However, the levy of TCS, introduced by the Finance Act, 2020, on LRS transactions such as gift/ money given to a relative is prima facie looks unconstitutional and may lead to a challenge in an appropriate case
Firstly, at the outset, a gift made to a relative is not a commercial transaction but rather a domestic transaction which is exempt under the Income-tax Act, 1961, and there is no necessity to bring the same within the purview of the Scheme of TCS. The Hon’ble Supreme Court in the case of GE India Technology Cen (P.) Ltd. v. CIT  187 Taxman 110/ 327 ITR 25 (SC) held that wherein it was held that payments to non-residents will be subjected to withholding tax only when such payments are chargeable to tax in India as per sections 5 & 9 of the Act. That is, a non-resident company having no PE in India nor having any business connection in India, the income on this account even if paid, is not taxable in India.
The principle upheld by the Hon’ble Supreme Court is that if a commercial transaction is not taxable in India, there is no need to impose any tax on such a transaction at its source. The gift given by a relative is not a commercial transaction and is a non-taxable transaction.
Hence the proposed law in Finance Act, 2020 on imposing TCS on exempt transactions was arbitrary and violative of Article 14 of the Constitution of India.
Secondly, the levy of TCS on cross-border transactions on a gift made to a relative, merely because the relative is located outside India is
discriminatory and violative of Article 14 of the Constitution of India i.e. Equality before the law; as the same transaction to a relative in India would be exempt from the levy of TCS.
The Doctrine of eclipse squarely applies to the said transaction, that the inconsistency in the new law should be overshadowed by the fundamental right of equality.
Thirdly, the LRS as the same suggests is a scheme for remittance up to a certain amount without the burden of excessive compliance. It authorizes the AD bank to undertake the remittance transaction without RBI’s permission.
The levy of a transaction tax and subsequent compliance on the same defeats the purpose of the LRS i.e. the existing law. The proposed amendment under the Income-tax Act, 1961 is inconsistent with the LRS issued under FEMA, 1999. The repugnancy or inconsistency in the latter law should be avoided and a harmonious interpretation should be given to the provisions. Therefore, the Scheme of TCS should carve out an exception for a gift made to a relative situated abroad.
Fourthly, as the transaction of a gift to a relative is not taxable, the amount of TCS paid will be given as credit while paying the taxes for the relevant year. This process of credit is understandable in a commercial transaction. However, in a strict domestic transaction, unwarranted collection of tax in advance is a deprivation of right property which is enshrined under Article 300A of the Constitution.
Lastly, the rate of 20 per cent is very high. This is the same rate used for the non-furnishing of PAN, inter alia. There is no need for a payer to bear an excess of 20 per cent on a payment made to his relative.
In conclusion, the Parliament or CBDT via delegated legislation should have carved out an exception to the amendment made via Finance Act, 2020 to save the TCS provisions from being ultra vires the Constitution. As an alternative, the newly amended TCS provisions can also be challenged via a Writ under Article 226 or 32 of the Constitution.
- Limiting the rollover benefit claimed under section 54 and section 54F of the Income-tax Act, 1961. [Clause 25 and 30] (2023) 451 ITR 75 (St)
The primary objective of sections 54 and section 54F of the Act was to mitigate the acute shortage of housing and to give impetus to house- building activity. However, it has been observed Government that claims of huge deductions by high-net-worth assessees are being made under these provisions, by purchasing very expensive residential houses and this is defeating the very purpose of these sections.
To prevent this, the Finance Bill, 2023 proposed to impose a limit on the maximum deduction that can be claimed by the assessee under sections 54 and 54F to rupees ten crores. It has been provided that if the cost of the new asset purchased is more than rupees ten crores, the cost of such asset shall be deemed to be ten crores.
It is desired that for the purpose of section 54F of the Act, on purchase of the first house for self- occupancy, there should not be a limit of Rs. 10 Crores.
- Introduction of the authority of Joint Commissioner (Appeals) [Clauses 3, 60, 61, 62, 64, 65, 73, 75, 76, 78, 79, 98, 99, 100, 101, 102, 103, 104, 107, 109, 110, 111, 112, 115, 117, 120, 121 & 122] (2023) 451 ITR 102(St)
More than 5 lakh appeals are pending before the Faceless Appeal Centre. The AIFTP made a representation to the Honourable Finance Minister to take remedial measures to expedite the hearing before the Faceless appeal centre.
According to the Memorandum explaining the provisions of the Finance Bill, 2023, it has been noted that as the first authority for appeal, Commissioner (Appeals) are currently overburdened due to the huge number of appeals
and the pendency being carried forward every year. To clear this bottleneck, a new authority for appeals is being proposed to be created at Joint Commissioner/ Additional Commissioner level to handle a certain class of cases involving a small amount of disputed demand. Such authority has all powers, responsibilities and accountability similar to that of a Commissioner (Appeals) with respect to the procedure for the disposal of appeals.
The earlier section 246 of the Act was providing for the appeal functions of the Deputy Commissioner (Appeals). That institution was discontinued in the year 2000. Accordingly, it is proposed to substitute section 246 of the Act to provide for appeals to be filed before Joint Commissioner (Appeals). 100 new Joint Commissioner (Appeals) have been appointed all over India.
An appeal cannot be filed before the Joint Commissioner (Appeals) where an order referred to under this sub-section is passed by or with the approval of an income-tax authority above the rank of Deputy Commissioner.
The pending appeals relating to Individuals and Hindu Undivided Families will be forwarded to the Joint Commissioner (Appeals).
The Joint Commissioner (Appeals) will function in a faceless manner and have the same powers as the Commissioner (Appeals)
Although this is a welcoming proposal, it is important to understand that increasing the capacity without rectifying the deficiency in the system will not hold well in the long run.
Today, as per our experience, there is not a single appeal where a remand report has been received in response to an application made under Rule 46A of the Income-tax Rules, 1962.
Further, it is advisable to choose Joint Commissioner (Appeals) and Commissioner (Appeals) amongst the Departmental Representatives who appear before the Income-
tax Appellate Tribunal. They have a better understanding of the appeal procedure and the expectations of the Hon’ble Tribunal. They would know how to pass orders which will be upheld by the Hon’ble Tribunal. They would also have a better understanding of the Principles of Natural Justice.
The success of the Joint Commissioner (Appeals) will depend on how they will discharge their quasi-judicial functions.
- Bringing the non-resident investors within the ambit of section 56(2)(viib) of the Act to eliminate the possibility of tax avoidance. (Clause 32) (2023) 451 ITR 76(St)
As per the existing provisions of section 56 (2)(viib) of the Act, if a closely held company receives consideration for the issuance of shares, and the consideration is greater than the Fair Market Value of the shares. The excess of consideration over the Fair Market Value of the shares was considered as Income of the closely held company. Rule 11UA of the Income-tax Rules, 1962 provides the formula for the computation of the fair market value of unquoted equity shares for Section 56(2) (viib) of the Act.
This provision was also called Angel-tax, as it posed a threat to companies raising funds from angel investors.
A certain class of company i.e., registered start-ups was exempted from this provision. Companies receiving consideration from Alternative Investment funds, Venture Capitalists, and Non-residents inter alia were exempted.
Now, to prevent tax evasion, the provision is extended to funds raised from non-residents as well.
The Hon’ble Supreme Court in the case of PCIT v. NRA Iron & Steel (P.) Ltd. (2019) 418 ITR 449/ (2020) 268 Taxman 1 (SC) held that where the assessee received share capital/premium, however, there was a failure of the assessee to establish the creditworthiness of investor companies, it was held that the Assessing Officer was justified in passing the assessment order making additions under section 68 of the Act for share capital/premium received by the assessee company.
Therefore, even if the closely held company manages to prepare a valuation report as per rule 11UA of the Income-tax Rules, 1962 doesn’t necessarily protect the company if the genuineness of the transaction is doubted. Further, an addition under section 68 of the Act will attract tax at the rate of 60 per cent as per section 115BBE of the Act.
Issues will arise in cases of foreign subsidiary companies in India, they would have to adhere to FEMA regulations and Transfer pricing provisions.
The Income-tax Act, 1961 considers the date of receipt for valuation whereas FEMA considers the date of issuance. Further, FEMA accepts any internationally prescribed method for valuation, however, the Act only considers Net Asset Value Method and Discounted Free Cash Flow Method. Further, FEMA requires the shares to be issued at Fair Market Value or Higher but the Act does not allow the shares to be issued at a value higher than the Fair Market Value.
Concerning Transfer Pricing provisions, the Hon’ble Bombay High Court in the case of Vodafone India Services (P.) Ltd. v. UOI  361 ITR 531 (Bom)(HC) where the assessee raised capital by issuance of shares from its foreign parent company, it was held that Chapter X i.e. Transfer Pricing does not apply to the said transaction as the transaction is a capital transaction and there is no element of Income.
After the proposed amendment, the excess consideration would be deemed to be income and the same would attract transfer pricing provisions and consequent compliances.
- Extending deeming provision under section 9 of the Act to gift to not- ordinarily resident (Clause 4) (2023) 451 ITR 61 (St)
The Government noticed that certain persons being not ordinarily residents are receiving gifts from a person resident in India and not paying taxes on it. To overcome this lacuna, it is proposed to extend the deeming provisions of section 9 of the Act to cover ‘not ordinary residents’.
The Finance Act, 2019 included non-residents within the ambit of section 9 of the Act. However, ‘not ordinary residents’ were not covered. This proposed amendment plugs this lacuna.
- Rationalisation of the provisions of Charitable Trust and Institutions. [Clauses 5, 7, 8, 9, 57, 60] (2023) 451 ITR 67 (St)
There are several amendments made in provisions pertaining to Charitable trusts and institutions viz. date for filing forms 9A and 10, registration for tax exemption, time frame for disposal of application for registration, powers to cancel registrations, exit tax and denial of Chapter VIA deduction on donation to certain funds.
There are several amendments being made to charitable trusts and institutions on a year-on- year basis. The interpretation of the settled Law regarding Charitable Organizations has been remoulded by the Hon’ble Supreme Court in the case of ACIT v. Ahmedabad Urban Development Authority  449 ITR 1 (SC) and New Noble
Educational Society v. CCIT  448 ITR 594 (SC). It becomes crucial for consultants to be updated with these changes, otherwise bona fide charitable organizations may suffer.
For example, on delay in filing Form 10B, CBDT issued Circular No. 2 of 2020 dated January 03, 2020, (2020) 420 ITR 38 (St) wherein a delay of up to 365 days could be condoned by Commissioner (E). On further delay, an application under section 119 (2)(b) of the Act would have to be made before CBDT (As held in the case of Little Angels Education Society v. UOI  434 ITR 423 (Bom)(HC). The powers of the Commissioner (E) were further widened empowering them to condone the delay of up to 3 years by CBDT vide Circular No. 15 of 2022 dated July 19, 2022 (2022) 445 ITR 85 (St), Circular No 16 of 2022 dated July 19, 2022 ( 2022) 445 ITR 86 (St) and Circular No 17 of 2022 dated July 20, 2022 (2022) 445 ITR 87 (St). This proves the fact that there is a high level of non-compliance in the case of Charitable organizations.
Most trustees of Charitable organizations are not well versed in the rapid changes in the law. It is an honorary position and cannot be expected to be updated either. Therefore, it is desired that the Department should release a document explaining its interpretation in simple language to avoid excessive litigation.
UAE introduced the corporate tax with effect from June 01, 2023. The UAE Government has explained the provision on their website and other social media platforms. It is desired to have a user-friendly website giving information to the stakeholders.
- Defining the cost of acquisition in case of certain assets for computing capital gains (Clause 31) (2023) 451 ITR 76 (St)
There are certain assets like intangible assets or any sort of right for which no consideration has been paid for the acquisition. The cost of acquisition of such assets is not clearly defined as ‘nil’ in the present provision. This has led to many legal disputes and the courts have held that for taxability under capital gains, there has to be a definite cost of acquisition or it should be deemed to be nil under the Act. Since there is no specific provision which states that the cost of such assets is nil, the changeability of capital gains from the transfer of such assets has not found favour with the Courts.
The intention of the Finance Bill is to overcome the decision of The Hon’ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty  128 ITR 294 (SC) wherein it was held that if the asset does not have any ascertainable cost, the computation mechanism fails and hence no capital gains can be computed.
The Hon’ble Bombay High Court in the case of Chheda Housing Development Corpn, a Partnership firm v. Bibijan Shaikh Farid & ors 2007 (3) MHLJ 402 (Bom) (HC) held that FSI/TDR being a benefit arising from the land, consequently must be held to be immovable property.
Now an issue arises whether TDR will be considered as an immovable-intangible property and whether the decision of the Hon’ble Bombay High Court in the case of CIT v. Sambhaji Nagar Co-op. Hsg. Society Ltd.  370 ITR 325 (Bom)(HC) held that where the assessee had not incurred any cost to acquire TDR attached to the land owned by the society, transfer of same to the developer for consideration for construction of a floor space index would not be eligible to capital gains tax. Whether the ratio will hold well after the proposed amendment is a debatable issue.
- Promoting timely payments to Micro and Small Enterprises [Clause 13] (2023) 451 ITR 70 (St)
To summarize, the budget has not proposed any harsh amendments and has also reduced the burden of compliance which will aid the ease of doing business.
The representation committee of the AIFTP is sending a detailed representation to the Hon’ble Finance Minister in the near future. We think that this special issue of the AIFTP Journal will be a useful reference to understand the various provisions of the Finance Bill, 2023.
Readers may send their suggestions for the representation to [email protected].