Wide Analysis of the Finance Bill 2016 (Union Budget 2016)

It is our immense pleasure to present the wide analysis of the Finance Bill 2016 (Union Budget 2016) in the very next morning of the Budget Speech.

Our analysis has covered the major aspects presented in the Budget and the analysis has been manifold in the various groups viz.

Ø  Relief to the Small Tax Payers,

Ø  Changes for the Corporate,

Ø  Start Up India Incentives

Ø  New tax for E Commerce and Digital Platform Business

Ø  Major Changes in the presumptive taxation which affects small businesses including the insertion of lock in period in it and also change in the threshold limit for Audit.

Ø  Change in TDS Rates and Threshold Limit and also proposed tax on Cash Purchase.

Ø  Undisclosed Income (Black Money) Declaration and Direct Tax Dispute Resolutions

Ø  Provisions related to Assessment

Ø  Rationalization of Penalty Provisions,

Ø  Incentives based on nature of business like Residential Construction, Power etc.

Ø  Tax Benefits for new employment generation

Ø  Various Small but important Amendments

The detailed analysis is as under:          

RELIEFS TO SMALL TAX PAYERS

• No change in the Income Tax rate of the persons other than company assesseee. 

• Rebate u/s 87A of the Income tax has been increased from Rs. 2000/- to Rs. 5000/-. A minor relief to small taxpayers. 

• In order to provide relief to the individual tax payers, it is proposed to amend section 80GG so as to increase the maximum limit of deduction from existing Rs. 2000 per month to Rs. 5000 per month. (Rent Paid by the Assessee) 

• Additional Benefit of Housing Loan Interest up to Rs. 50,000/- subject to the conditions. 

• Increase in time period for acquisition or construction of self-occupied house property for claiming deduction of interest 

Section 24(b) of the Act provides that interest payable on capital borrowed for acquisition or construction of a house property shall be deducted while computing income from house property

Such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed. It is proposed to increase the time duration to five years instead of existing three years.

• Simplification and rationalisation of provisions relating to taxation of unrealised rent and arrears of rent 

Existing provisions of sections 25A, 25AA and 25B relate to special provisions on taxation of unrealised rent allowed as deduction when realised subsequently, unrealised rent received subsequently and arrears of rent received respectively.

It is proposed to simplify these provisions and merge them under a single new section 25A

It is proposed to provide that the amount of rent received in arrears or the amount of unrealized rent realised subsequently by an assessee shall be charged to income-tax in the financial year in which such rent is received or realised, whether the assessee is the owner of the property or not in that financial year.

It is also proposed that 30% of the arrears of rent or the unrealized rent realized subsequently by the assessee shall be allowed as deduction.

• Rationalization of section 56 of the Income-tax Act 

With a view to bring uniformity in tax treatment, it is proposed to amend the Act so as to provide that any shares received by an individual or HUF as a consequence of demerger or amalgamation of a company shall not attract the provisions of clause (vii) of sub-section (2) of section 56.

Earlier such benefit is available only if the recipient is a firm or a company.

CORPORATE TAXATION:

The Finance Minister in his Budget Speech, 2015 has indicated that the rate of corporate tax will be reduced from 30% to 25% over the next four years along with corresponding phasing out of exemptions and deductions.

With a view to that, following amendments are provided for Corporate Taxation

• Rate of income tax has been set as 25% for the Domestic Company which is registered after 1^st Day of March 2016 and engaged in the business of manufacture or production of any article or thing and not claimed any special relaxations under the Income Tax Act. 

• Rate of income tax has been set as 29% for the Domestic company whose total turnover or the gross receipts in the previous year 2014-15 does not exceed five crore rupees, else 30% will be the rate of tax.

Phasing out of deductions and exemptions

• Profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate tax payers. 

• Sunset dates provided in the Act will not be modified. 

• A tax incentive with no terminal date, 31.03.2017 would be the applicable terminal date either for claim of the expenditure or for claiming the benefit. 

• Following are the summarized view of various sections: 

Part I: Following amendments are applicable w.e.f 01.04.2017 and will apply in relation to A.Y. 2017-18 and subsequent years.
Relevant Section	Amended Provision
10AA	No Deduction for Units commencing production after 31.03.2020
35AC	No deduction shall be available w.e.f 01.04.2017
35CCD	Deduction shall be restricted to 100% from 01.04.2020 instead 150% at present.
80IA, 80IB and 80IAB	No Deduction for Units commencing production after 31.03.2017
Part II: Following amendments are applicable w.e.f 01.04.2018 and will apply in relation to A.Y. 2018-19 and subsequent years.
Section 32 r.w. Rule 5 - Accelerated Depreciation.	The highest rate of depreciation will be 40% instead of 100% at present.
35(1)(ii)	Weighted deduction shall be restricted to 150% from 01.04.17 to 31.03.20 and then restricted to 100%. (Present 175%)
35(1)(iii)	Deduction would be restricted to 100% instead 125% at present.
35(2AA)	Weighted deduction shall be restricted to 150% from 01.04.17 to 31.03.20 and then restricted to 100%. (Present 200%)
35(2AB)	Weighted deduction shall be restricted to 150% from 01.04.17 to 31.03.20 and then restricted to 100%. (Present 200%)
35AD	Weighted deduction shall be restricted to 100% (Present 150%)
35CCC	Weighted deduction shall be restricted to 100%. (Present 150%)

Exemption of income of Foreign company from storage and sale of crude oil stored as part of strategic reserves.

For the non residents, the taxation of the income takes place when it deemed to accrue or arise in India directly or indirectly derived through or from a business connection in India.

The Govt. is planning to create underground storage facility for storage of crude oil as part of strategic reserves. It is in India's national interest and ensures price stability for Indian oil companies.

• Therefore, it is proposed to amend the provisions of section 10 of the Act to provide that any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India shall not be included in the total income.

• The amendment will take effect from A.Y.16-17. It means it is also available for the current financial year also.

Exemption to Foreign Mining Companies (FMC) in respect of certain activity related to diamond trading in "Special Notified Zone".

"Special Notified Zone" (SNZ) had been created to facilitate shifting of operations by foreign mining companies (FMC) to India and to permit the trading of rough diamonds in India by the leading diamond mining companies of the world.

The activity of FMC of mere display of rough diamonds even with no actual sale taking place in India may lead to creation of business connection in India of the FMC and thereby would be taxable u/s 9 of the Act.

• In order to facilitate the FMCs to undertake activity of display of uncut diamond (without any sorting or sale) in the SNZ, it is proposed to amend section 9 of the Act to provide that in the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to from the above activities.

Applicability of Minimum Alternate Tax (MAT) on foreign companies for the period prior to 01.04.2015.

Section 115JB of the Act prescribes a MAT @ 18.5% on the company assessee.

The applicability of it to the FIIs has been provided Vide Finance Act, 2015 of the provisions of section 115JB were amended to provide that in case of a foreign company any income chargeable at a rate lower than the rate specified in section 115JB shall be reduced from the book profits and the corresponding expenditure will be added back.

However, since this amendment was prospective w.e.f. assessment year 2016-17, the issue for assessment year prior to 2016-17 remained to be addressed.

It is proposed to amend the Income-tax Act so as to provide that with effect from 01.04.2001, the provisions of section 115JB shall not be applicable to a foreign company if –

(i)             the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assesse does not have a permanent establishment in India in accordance with the provisions of such Agreement; or

(ii)            the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above and the assessee is not required to seek registration under any law for the time being in force relating to companies.

This amendment is proposed to be made effective retrospectively from the 1stday of April, 2001 and shall accordingly apply in relation to assessment year 2001-02 and subsequent years.

Rationalization of conversion of a company into Limited Liability Partnership (LLP)

Existing provisions of clause (xiiib) of Section 47 provides that conversion of a private limited or unlisted public company into Limited Liability Partnership (LLP) shall not be regarded as transfer, if certain conditions are fulfilled, which, inter alia, include a condition that the company's gross receipts, turnover or total sales in any of the preceding three years did not exceed Rs.60 lakh.

It is proposed to amend the said section so as to provide that, for availing tax-neutral conversion, in addition to the existing conditions, the value of the total assets in the books of accounts of the company in any of the three previous years preceding the previous year in which the conversion takes place, should not exceed five crore rupees.

Tax on Distributed Income to Shareholder (On the occasion of the Buy Back of Securities)

Section 115QA of the Act provide for the levy of additional tax @ 20% of the distributed income on account of buy back of unlisted shares of a company.

The buyback can be undertaken by the company under different provisions of the Companies Act, 1956 or the Companies Act, 2013 while Sec. 115QA was limited to Section 77A of the Companies Act, 1956.

In order to provide clarity on the above issues, it is proposed to amend section 115QA to provide that the provisions of this section shall apply to any buy back of unlisted share undertaken by the company in accordance with the provisions of the law relating to the Companies and not necessarily restricted to section 77A of the Companies Act, 1956.

The amendment will take effect from 1st June, 2016.

TAX INCENTIVES FOR START-UPS

India has the best brains of the country. However, they are not able to find the proper environment for the Start Ups and therefore either the creativity fails or the creativity will be nurtured outside India.

So, the Govt. has prescribed the following tax incentives for Start Ups.

• 100% of the Profit will be exempted derived by the Eligible Start Up set up before 01.04.2019. 

• A fund will be established to raise Rs. 2500 Crores annually for four years to finance the start ups 

• Section 54EE of the Act to provide exemption from capital gains tax if the long term capital gains proceeds are invested by an assessee in units of such specified fund. Lock in Period of 3 Years. Max Cap Rs. 50 Lacs. 

• Section 54GB will be amended to invest such capital gains are invested in subscription of shares of a company which qualifies to be a small or medium enterprise under the MSME Act, 2006. 

• Section 54GB further amended the wings of exemption if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible start-up subject to the condition that the individual or HUF holds more than fifty per cent shares of the company and such company utilises the amount invested in shares to purchase new asset before due date of filing of return by the investor. 

• Further it is proposed to amend section 54GB so as to provide that the expression "new asset" includes computers or computer software in case of technology driven start-ups so certified by the Inter-Ministerial Board of Certification notified by the Central Government in the official Gazette.

Also the rate of corporate taxation as mentioned in the ‘Corporate’ tab is a tax incentive for start ups.

NEW TAX FOR E COMMERCE AND DIGITAL PLATFORM BUSINESS CALLED AS EQUALIZATION LEVY

Today the business has changed its wings and new concepts of the E Commerce and digital platforms have been generated. 

If the old principles of Permanent Establishment (PE) (PE is the base for changing the taxation) are to be kept same then the Govt. would have loss of revenue.

So It also recommended to impose of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalization levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.

It is proposed to provide for an equalisation levy of 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment ('PE') in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.

However, the small players in the digital domain would be exempted.

This will take the effect on the date specified by the Central Govt.

CHANGES IN THE PRESUMPTIVE TAXATIONS AND THRESHOLD LIMIT FOR AUDIT

First Time Introduction of Presumptive taxation scheme for persons having income from profession

The existing scheme of taxation provides for a simplified presumptive taxation scheme u/s 44AD of the Act for certain eligible persons engaged in certain eligible business only and not for persons earning professional income

• In this regard, new section 44ADA is proposed to be inserted in the Act to provide for estimating the income of an assessee who is engaged in any profession referred to in sub-section (1) of section 44AA  and whose total gross receipts does not exceed Rs. 50 Lacs in a previous year, at a sum equal to 50%. of the total gross receipts, or, as the case may be , a sum higher than the aforesaid sum earned by the assessee. 

• The scheme will apply to such resident assessee who is an individual, Hindu undivided family or partnership firm but not Limited Liability partnership firm. 

Other conditions and benefits as mentioned u/s 44AD of the Act.

Increase in threshold limit for audit for persons having income from profession and business:

• Turnover limit for audit for the business assesses has been increased to Rs. 200 Lacs from existing Rs. 100 Lacs.(Not Mentioned in the Budget Speech but as the limit for Sec. 44AD has been increased, so it is the expected one)

• Turnover limit for audit for the assesses engaged in the Profession has been increased to Rs. 50 Lacs from existing Rs. 25 Lacs. 

• Also a clause inserted that prescribes of declaring profit for any of the five assessment years not in accordance with the provision of Section 44AD(1) of the Act he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1). 

• Further as the turnover limit of presumptive taxation scheme has been enhanced to rupees two crore, it is proposed to provide that eligible assessee shall be require to pay advance tax. However, in order to keep the compliance minimum in his case, it is proposed that he may pay advance tax by 15th March of the financial year. 

PROVISIONS RELATED TO TDS AND TCS

Increase in threshold limit / Percentage of deduction of tax at source (TDS)

Section	Existing Limit	Proposed Limit
192A  - For Payment of accumulated balance due to an employee	30000	50000
194BB	5000	10000
194C – Aggregate Limit	75000	100000
194LA	200000	250000
194D	20000 / 10%	15000 / 5%
194G	1000 / 10%	15000 / 5%
194H	5000 / 10%	15000 / 5%
194DA	2%	1%
194EE	20%	10%

Tax Collection at Source (TCS) on sale of vehicles; goods or services – 206(1D)

In order to reduce the quantum of cash transaction in sale of any goods and services and for curbing the flow of unaccounted money in the trading system and to bring high value transactions within the tax net,

it is proposed to provide that the seller shall collect the tax at the rate of 1% from the purchaser on sale of motor vehicle of the value exceeding Rs. 10 Lacs and sale in cash of any goods (other than bullion and jewellery), or providing of any services (other than payments on which tax is deducted at source under Chapter XVII-B) exceeding Rs. 2 Lacs.

For bullion, jewellary etc. Section 207C was already specified under the I.T. Act.

The amendment will take effect from 1st June, 2016.

THE INCOME DECLARATION SCHEME, 2016

An opportunity is proposed to be provided to persons who have not paid full taxes in the past to come forward and declare the undisclosed income and pay tax, surcharge and penalty totalling in all to forty-five per cent of such undisclosed income declared.

• Rate of tax would be 30% on the declared income + 25% Surcharge on tax payable (Called as Krishi Kalyan Cess) and a penalty at 25% of tax payable. 

• So effective rate of tax including penalty and surcharge would be 45% of the undisclosed income. 

However, following cases shall not be eligible for the scheme:

• where notices have been issued under section 142(1) or 143(2) or 148 or 153A or 153C, or
• where a search or survey has been conducted and the time for issuance of notice under the relevant provisions of the Act has not expired, or
• where information is received under an agreement with foreign countries regarding such income,
• cases covered under the Black Money Act, 2015, or
• persons notified under Special Court Act, 1992, or
• cases covered under Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967, the Prevention of Corruption Act, 1988. 

Benefits by opting this scheme.

• Exempt from wealth tax in respect of assets specified in declaration
• No scrutiny and enquiry under the Income-tax Act and Wealth-tax Act
• Immunity from prosecution
• Immunity from the Benami Transactions (Prohibition) Act, 1988 

These amendments will take effect from the 1st day of June, 2016.

THE DIRECT TAX DISPUTE RESOLUTION SCHEME, 2016

Litigation has been a major area of concern for the India. Numbers of cases are pending at all the appellate levels.

In order to reduce the huge backlog of cases and to enable the Government to realise its dues expeditiously, it is proposed to bring the Direct Tax Dispute Resolution Scheme, 2016

Salient features of the scheme are as follows:

• The scheme be applicable to "tax arrear" which is defined as the amount of tax, interest or penalty determined under the Income-tax Act or the Wealth-tax Act, 1957 in respect of which appeal is pending before the Commissioner of Income-tax (Appeals) or the Commissioner of Wealth-tax (Appeals) as on the 29th day of February, 2016. 

• The pending appeal could be against an assessment order or a penalty order. 

• The declarant under the scheme be required to pay tax at the applicable rate plus interest upto the date of assessment. 

• However, in case of disputed tax exceeding rupees ten lakh, twenty-five percent of the minimum penalty leviable shall also be required to be paid. 

• In case of pending appeal against a penalty order, twenty-five percent of minimum penalty leviable shall be payable alongwith the tax and interest payable on account of assessment or reassessment. 

• Consequent to such declaration, appeal in respect of the disputed income and disputed wealth pending before the Commissioner (Appeals) shall be deemed to be withdrawn. 

Immunity from prosecution

In certain cases as defined, a person is not eligible for the scheme. 

PROVISIONS RELATED TO ASSESSMENT:

It has been specified that processing under section 143(1) of the Act to be mandated before assessment u/s 143(3) of the Act.

Providing Time limit for disposing applications made by assessee under section 273A, 273AA or 220(2A)

Under the existing provisions no time limit has been provided regarding the passing of orders either under section 220 or Sections 273A or 273AA. Further, these provisions do not specifically mandate that assessee be given an opportunity of being heard in case such application is rejected by an authority.

Therefore, in order to rationalise the provisions and provide for specific time-line, amendment to the existing provisions have been proposed.

An order accepting or rejecting application of an assessee shall be passed by the concerned Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner within a period of twelve months from the end of the month in which such application is received.

Opportunity of being heard will be provided to the assessee in case of rejection of application.

Applications pending as on 01^st day of June 2016, required to be disposed on or before March 31, 2017.

These amendments will take effect from 1st June, 2016

Providing legal framework for automation of various processes and paperless assessment

It is proposed to amend the relevant provisions of the Act so as to provide adequate legal framework for paperless assessment in order to enhance efficiency and reduce the burden of compliance. A series of changes are proposed to achieve this end.

Necessary amendments have been made in Section 282A(1), 143(2) and Section 2.

These amendments will take effect from the 1st day of June, 2016. 

Rationalisation of time limit for assessment, reassessment and recomputation

• the period, for completion of assessment under section 143 or section 144 be changed from existing two years to twenty-one months from the end of the assessment year in which the income was first assessable; 

• the period for completion of assessment under section 147 be changed from existing one year to nine months from the end of the financial year in which the notice under section 148 was served; 

• the period for completion of fresh assessment in pursuance of an order under section 254 or section 263 or section 264, setting aside or cancelling an assessment be changed from existing one year to nine months 

• It is further proposed to provide that the period for giving effect to an order, under sections 250 or 254 or 260 or 262 or 263 or 264 or an order of the Settlement Commission under sub-section (4) of section 245D, where effect can be given wholly or partly otherwise than by making a fresh assessment or reassessment shall be three months from the end of the month in which order is received or passed, 

• In respect of cases pending as on 1st June 2016, the time limit for passing such order is proposed to be extended to 31.3.2017. 

Rationalization of time limit for assessment in search cases

The limitation for completion of assessment under section 153A – to be changed from existing two years to twenty-one months from the end of………..

The limitation for completion of assessment under section 153C – to be changed from existing one year to nine months from the end of………..

The amendment will take effect from 1st day of June, 2016.

Payment of interest on refund

It is also proposed to provide that where a refund arises out of appeal effect being delayed beyond the time prescribed under sub-section (5) of section 153, the assessee shall be entitled to receive, in addition to the interest payable under sub-section (1) of section 244A, an additional interest on such refund amount calculated at the rate of 3% per annum, for the period beginning from the date following the date of expiry of the time allowed under sub-section (5) of section 153 to the date on which the refund is granted. It is clarified that in cases where extension is granted by the Principal Commissioner or Commissioner by invoking proviso to sub-section (5) of section 153, the period of additional interest, if any, shall begin from the expiry of such extended period.

Hon’ble Finance Minster also specifically pointed out that the officer who has made delay will be made accountable.

These amendments will take effect from 1st day of June, 2016.

Rationalisation of the provisions relating to Appellate Tribunal

it is proposed to amend sub-section (2) of section 254 to provide that the Appellate Tribunal may rectify any mistake apparent from the record in its order at any time within six months from the end of the month in which the order was passed as existing four years from the date of order.

it is proposed to amend the said sub-section (3) so as to provide that a single member bench may dispose of a case where the total income as computed by the Assessing Officer does not exceed fifty lakh rupees.

These amendments will take effect from 1st day of June, 2016.

RATIONALISATION OF PENALTY PROVISIONS

Amendment to Section 271(1)(c)

At present penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under section 271(1)(c) of the Income-tax Act.

The penalty may be levied at the rate of 100% or the 300% of the tax that has been evaded. It is up to the discretion of the Income Tax officer to levy the penalty within this range. As it is up to the discretion of the ITO, assessee may get harassed sometimes.

Therefore, the Hon’ble FM has specifically mentioned in his budget speech that to take away the discretion of the ITO, Section 271(1)(c) will be abolished and new Section 270A will be inserted.

Section 270A(1) seeks to provide that the Assessing Officer, Commissioner (Appeals) or

the Principal Commissioner or Commissioner may levy penalty if a person has under reported his income

And the quantum of penalty will also be definite and not be variable at the discretion of the ITO.

Similarly, Amendment of section 271AAB of the Act has been carried out and the penalty on such undisclosed income at a flat rate of 60% of such income instead of present provision of 30% to 90% of the undisclosed income as may be decided by the ITO at his discretion.

Provision for bank guarantee under section 281B

A very good provision has been inserted by the Hon’ble FM which specifies that if the Bank Guarantee of a Nationalized Bank furnished by the assessee then no attachment to the property should be made the assessing officer to recover the tax.

The provision is summarized as below:

Under the existing provisions of section 281B the Assessing Officer may provisionally attach any property of the assessee during the pendency of assessment or reassessment proceedings, for a period of six months with the prior approval of the income- tax authorities specified therein, if he is of the opinion that it is necessary to do so for the purpose of protecting the interests of the revenue. Such attachment of property is extendable to a maximum period of two years or sixty days after the date of assessment order, whichever is later.

It is proposed that the Assessing Officer shall revoke provisional attachment of property made under sub-section (1) of the aforesaid Section in a case where the assessee furnishes a bank guarantee from a scheduled bank, for an amount not less than the fair market value of such provisionally attached property or for an amount which is sufficient to protect the interests of the revenue.

Immunity from penalty and prosecution in certain cases by inserting new section 270AA

It is proposed to provide that an assessee may make an application to the Assessing Officer for grant of immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C, provided he pays the tax and interest payable as per the order of assessment or reassessment within the period specified in such notice of demand and does not prefer an appeal against such assessment order. The assessee can make such application within one month from the end of the month in which the order of assessment or reassessment is received in the form and manner, as may be prescribed

• Rate of surcharge is increased to 15% from existing 12% in case of Individual, HUF, AOP, BOI or artificial judicial person. 

VARIOUS SPECIFIC BUSINESS RELATED AMENDMENTS

Extending the benefit of initial additional depreciation under section 32(1)(iia) for power sector

Under the existing provisions of section 32(1)(iia) of the Act, additional depreciation of 20% is allowed in respect of the cost of new plant or machinery acquired and installed by certain assessees engaged in the business of generation and distribution of power .

The Govt. has target to electrify every village in the country by the year 2018. However, in India there is also problem of power transmission. So special incentive is required for the transmission companies.

• Therefore, the benefit of the additional depreciation of 20% is extended to the certain assesses engaged in power transmission business.

Taxation of Income from 'Patents'

Research and Development is the backbone of the any country.

Therefore, In order to encourage indigenous research & development activities and to make India a global R & D hub, the Government has decided to put in place a concessional taxation regime for income from patents.

The aim of the concessional taxation regime is to provide an additional incentive for companies to retain and commercialize existing patents and to develop new innovative patented products.

This will also encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in India.

• Accordingly, it is proposed to insert new section 115BBF to provide that where the total income of the eligible assessee* income includes any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the rate of 10% ( plus applicable surcharge and cess) on the gross amount of royalty. No expenditure or allowance in respect of such royalty income shall be allowed under the Act. 

*Eligible Assessee would mean a person resident in India who is the first inventor and whose name is registered on the Patent Master.

Incentives for Promoting Housing for All

The another major commitment that Hon’ble Narendra Modi gave at the time of Central Election is to provide housing for all.

• Therefore, it has been provided that 100% of the profits of an assesseee engaged in developing and building affordable housing projects subject to satisfying the conditions would be exempt.

• Incentive to the first home buyers availing home loans by providing additional deduction in respect of interest on loan taken for residential house property from any financial institution up to Rs. 50,000. This is in addition to the existing limit of Rs. 2 Lacs available u/s 24 of the act. 

Provided that the value of the house is less than Rs. 50 Lacs and loan amount not exceeding Rs. 35 Lacs sanctioned during 01.04.2016 to 31.03.2017

Tax incentive for employment generation

The main agendas of the Central Election of the campaigning of Mr. Modi is – Electrification of Every Villages, Providing Employment, Increasing Foreign Investment in India, House for all.

With a view to provide more employment, Section 80JJA has been amended. It is extended to all the sectors.

• It is further proposed to relax the norms for minimum number of days of employment in a financial year from 300 days to 240 days and also the condition of ten per cent increase in number of employees every year is proposed to be done away with. 

• It is also proposed to provide that in the first year of a new business, thirty percent of all emoluments paid or payable to the employees employed during the previous year shall be allowed as deduction. 

• However, only those employees would be covered where the cost incurred on any employee whose total emoluments should not exceed Rs 50,000/-.  

Rationalization of scope of tax incentive under section 32AC – Additional Depreciation

The existing provision of sub-section (1A) in section 32AC of the Act provides for investment allowance at the rate of 15% on investment made in new assets (plant and machinery) exceeding Rs.25 crore in a previous year by a company engaged in manufacturing or production of any article or thing subject to the condition that the acquisition and installation has to be done in the same previous year.

This tax incentive is available up to 31.03.2017.

The dual condition of acquisition and installation causes genuine hardship in cases in which assets having been acquired could not be installed in same previous year.

• It is proposed to amend the sub-section (1A) of section 32AC so as to provide that the acquisition of the plant & machinery of the specified value has to be made in the previous year. 

• However, installation may be made by 31.03.2017 in order to avail the benefit of investment allowance of 15%. It is further proposed to provide that where the installation of the new asset is in a year other than the year of acquisition, the deduction under this sub-section shall be allowed in the year in which the new asset is installed. 

: VARIOUS SMALL BUT IMPORTANT PROVISIONS :

Rationalization of taxation of income by way of dividend

Dividend which suffers the DDT u/s 115 (O) of the Act is exempt in the hands of the shareholders u/s 10(34) of the Act. Rate of DDT is 15%.

So if the person is falling in the tax bracket of 30% then also it will attract the tax liability of 15%. This will have undue advantage to the high worth individuals. This proposal has been moved by our former Finance Minister Mr. P. Chidambaram.

Therefore, Hon’ble FM amended to provide that any income by way of dividend in excess of Rs. 10 lakh shall be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm who is resident in India, at the rate of ten percent. The taxation of dividend income in excess of ten lakh rupees shall be on gross basis.

Levy of tax where the charitable institution ceases to exist or converts into a non-charitable organization

Sections 11 and 12 of the Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions, subject to various conditions contained in the said sections.

Where such income cannot be applied during the previous year, it has to be accumulated and invested in the modes prescribed and applied for such purposes in accordance with various conditions provided in the section.

A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may convert into a non-charitable organization. In such a situation, the existing law does not provide any clarity as to how the assets of such a charitable institution shall be dealt with.

Accordingly, it is proposed to amend the provisions of the Act. The elements of the regime are:

(i)             The accretion in income (accreted income) of the trust or institution shall be taxable on conversion of trust or institution into a form not eligible for registration u/s 12 AA or on merger into an entity not having similar objects and registered under section 12AA or on non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved under section 10(23C) within a period twelve months from dissolution.

(ii)            Accreted income shall be amount of aggregate of total assets as reduced by the liability as on the specified date. The method of valuation is proposed to be prescribed in rules.

(iii)           The taxation of accreted income shall be at the maximum marginal rate.

(iv)          This levy shall be in addition to any income chargeable to tax in the hands of the entity.

(v)   This tax shall be final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it shall be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.

(vi)  In case of failure of payment of tax within the prescribed time a simple interest @ 1% per month or part of it shall be applicable for the period of non-payment.

(vii) For the purpose of recovery of tax and interest, the principal officer or the trustee and the trust or the institution shall be deemed to be assessee in default and all provisions related to the recovery of taxes shall apply. Further, the recipient of assets of the trust, which is not a charitable organisation, shall also be liable to be held as assessee in default in case of non-payment of tax and interest. However, the recipient's liability shall be limited to the extent of the assets received.

These amendments will take effect from 1st June, 2016. 

Exemption from requirement of furnishing PAN under section 206AA to certain non-resident.

Section 206AA of the Act prescribes that if a person fails to provide PAN for deduction of tax, then tax will be deducted at the relevant rate or at 20% whichever is higher. This provision is also applicable to NRIs.

• In order to reduce compliance burden, it is proposed to amend the said section 206AA so as to provide that the provisions of this section shall also not apply to a non-resident, not being a company, or to a foreign company, in respect of any other payment, other than interest on bonds, subject to such conditions as may be prescribed. 

This amendment will take effect from 1st June, 2016.

Extension of scope of section 43B to include certain payments made to Railways

The existing provisions of section 43B of the Act, inter alia, provide that any sum payable by the assessee by way of tax, cess, duty or fee, employer contribution to Provident Fund, etc., is allowable as deduction of the previous year in which the liability to pay such sum was incurred (relevant previous year) if the same is actually paid on or before the due date of furnishing of the return of income irrespective of method of accounting followed by a person.

With a view to ensure the prompt payment of dues to Railways for use of the Railway assets, it is proposed to amend section 43B so as to expand its scope to include payments made to Indian Railways for use of Railway assets within its ambit

Sovereign Gold Bond Scheme, 2015

Last year, GOI has introduced the Sovereign Gold Bond Scheme with the aim of reducing the demand for physical gold so as to reduce the outflow of foreign exchange on account of import of gold

• Section 47 of the Act amended to provide that any redemption of Sovereign Gold Bond under the Scheme, by an individual shall not be treated as transfer and therefore shall be exempt from tax on capital gains. 

• It is also proposed to amend section 48 of the Income-tax Act, so as to provide indexation benefits to long terms capital gains arising on transfer of Sovereign Gold Bond to all cases of assesses 

Rupee Denominated Bond

The Reserve Bank of India has recently permitted Indian corporate to issue rupee denominated bonds outside India as a measure to enable the Indian corporate to raise funds from outside India.

• Section 48 of the Act so as to provide that the capital gains, arising in case of appreciation of rupee between the date of issue and the date of redemption against the foreign currency in which the investment is made shall be exempt from tax on capital gains. 

Consolidation of 'plans' within a 'scheme' of mutual fund

It is proposed to amend Section 47 so as to provide that any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund shall not be considered transfer for capital gain tax purposes and thereby shall not be chargeable to tax.

Tax Treatment of Gold Monetization Scheme, 2015

It is proposed to amend Clause (14) of section 2, so as to exclude Deposit Certificates issued under Gold Monetisation Scheme, 2015 notified by the Central Government, from the definition of capital asset and thereby to exempt it from capital gains tax.

It is also proposed to amend clause (15) of section 10 so as to provide that the interest on Deposit Certificates issued under the Scheme, shall be exempt from income-tax.

Clarification regarding set off losses against deemed undisclosed income.

It is proposed to amend the provisions of the sub-section (2) of section 115BBE to expressly provide that no set off of any loss shall be allowable in respect of income under the sections 68 or section 69 or section 69A or section 69B or section 69C or section 69D. 

Taxation of Non-compete fees and exclusivity rights in case of Profession

It is proposed to amend clause (va) of section 28 of the Act to bring the non-compete fee received/receivable( which are recurring in nature) in relation to not carrying out any profession, within the scope of section 28 of the Act i.e. the charging section of profits and gains of business or profession.

Such receipt would be taxed under the head ‘Capital Gain’ and not under ‘Profits and Gains from Business & Profession’.            

Cost of acquisition etc would be Nil.

Amortization of spectrum fee for purchase of spectrum

Government has newly introduced spectrum fee for auction of airwaves.

There is uncertainty in tax treatment of payments in respect of Spectrum i.e. whether spectrum is an intangible asset and the spectrum fees paid is eligible for depreciation under section 32 of the Act or whether it is in the nature of a 'license to operate telecommunication business' and eligible for deduction under section 35ABB of the Act.

it is proposed to insert a new section 35ABA in the Act to provide for tax treatment of spectrum fee. The section seeks to provide, any capital expenditure incurred and actually paid by an assessee on the acquisition of any right to use spectrum for telecommunication services by paying spectrum fee will be allowed as a deduction in equal instalments over the period for which the right to use spectrum remains in force.

Enabling of Filing of Form 15G/15H for rental payments

it is proposed to amend the provisions of section 197A for making the recipients of payments referred to in section 194-I also eligible for filing self-declaration in Form no 15G/15H for non-deduction of tax at source in accordance with the provisions of section 197A.

This amendment will take effect from 1st June, 2016. 

Change in STT (Securities Transaction Tax):

STT on sale of option in securities where option is not exercised is 0.017% of the option premium. Proposed to increase it to 0.5%.

The amendment will take effect from 1st June, 2016.

Deduction in respect of provision for bad and doubtful debt in the case of Non-Banking Financial companies

Till now this benefit is available only to Banks u/s 36(1)(viia)(c) of the Act. Now it has been extended to NBFCs also.