Tuesday, February 2, 2021

Budget 2021: Detailed Tax Updates from the Finance Bill 2021

This piece is an extension of our summary of the Highlights from the Budget Speech 2021.

The sections referred to herein are of the Income Tax Act, 1961, except wherever specifically mentioned being of any other Act.

No Change in Tax Rates (same as last year)

No change in tax rates for individuals, HUFs, companies, firms and others.

As earlier announced, an individual or HUF shall have the option to pay tax in respect of the total income at lower slab rates as announced last year, as part of Section 115BAC. A co-operative society shall have the option to pay tax at lower rate of 22% as per Section 115BAD

Input Tax Credit (ITC) only on Invoices/Notes Reflecting in GSTR-2A/GSTR-2B

A new clause (aa) to section 16(2) of the CGST Act is being inserted to provide that input tax credit on invoice or debit note may be availed only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies.

Tax Audit Turnover Threshold increased to Rs. 10 Crore (if over 95% banking transactions)

if total sales, turnover or gross receipts from business exceed Rs. 1 crore, a person is required to get his accounts audited. The threshold limit for audit u/s 44AB was increased to Rs. 5 crores last year if minimum 95% of all receipts and payments were made through banking or digital channels. This limit has now been increased to Rs. 10 crore.

No Requirement of Professional Certified GST Annual Return & Reconciliation

Section 35(5) of the CGST Act is being omitted so as to remove the mandatory requirement of getting annual accounts audited and reconciliation statement submitted by specified professional.

Section 44 of the CGST Act is being substituted so as to remove the mandatory requirement of furnishing a reconciliation statement duly audited by specified professional and to provide for filing of the annual return on self-certification basis.

Linking of Foreign Exchange Remittance in Case of Export of Goods with Refund

Section 16 of the IGST Act is being amended so as to link the foreign exchange remittance in case of export of goods with refund.

Further, such amendment will propose to restrict the zero-rated supply on payment of integrated tax only to a notified class of taxpayers or notified supplies of goods or services.

Timely Payment of PF and Other Such Statutory Dues to Claim Deduction from Business Profit

If any sum towards contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date for such payment, only then will the same be allowed as deduction as expense for the purpose of computing taxable profit.

Advance Tax Installment for Dividend Income

Advance Tax Installment for the purpose of dividend income will only be calculated from the date of declaration or receipt of such dividend and not computed assuming that the amount of dividend income is known to the assessee from the beginning of the year.

Changes Proposed for Charitable Institutions

Section 10(23C)(iiiad) provides that the income earned by any university or educational institution existing solely for educational purposes and not for the purposes of profit shall be exempt from tax if the aggregate annual receipts of such university or educational institution do not exceed Rs. 1 crore. Thus, an educational institution having receipts up to Rs. 1 crore can claim full exemption under the above clause without requiring a separate approval or registration. Such threshold has now been increased to Rs. 5 crore.

Corpus donations need to be invested in a manner prescribed in section 11(5) and application out of corpus will not be considered as application of income for charitable purposes. 

Application out of loans will not be considered as application of income for charitable purposes. However, when the loans are repaid, they can be considered as an application of income. 

It has further been clarified that excess application of income in earlier years will not be considered as application of income in the year under consideration.

Exemption from Filing Return of Persons above 75 Years

A person above the age of 75 years receiving only pension income and interest from the same bank that pays pension, only, would be exempt from filing his return provided the bank has deducted TDS on the entire pension and interest amount payable to such person.

No exemption if there are other interests and incomes from deposits in other banks. Further, it shall only happen if such senior citizen submits a declaration to such effect with their bank.

LTC Cash Scheme (as earlier announced in 2020)

In view of the situation arising out of the pandemic, the government has proposed to provide tax exemption to cash allowance in lieu of LTC to government employees.

Thus, the value in lieu of any LTC/LTA received by, or due to, an individual shall be exempt subject to fulfilment of the following conditions:

(a) The employee exercises the option for the deemed LTC fare in lieu of the applicable LTC in the Block of years 2018-21;

(b) Specified expenditure means expenditure incurred by an individual or a member of his family during the specified period on goods or services which are liable to tax at an aggregate rate of 12% or above under various GST laws and goods are purchased or services procured from GST registered vendors/service providers;

(c) Specified period means the period commencing from 12-Oct-2020 and ending on 31-Mar-2021;

(d) the amount of exemption shall not exceed lesser of: Rs. 36000 per person or 1/3rd of specified expenditure.

(e) the payment to GST registered vendor/service provider is made through banking or digital channels, and tax invoice is obtained.

Extension of Date for Sanction of Affordable Housing Loan Eligible for Additional Deduction on Interest Payment (existing scheme)

As per section 80EEA, for a person who does not own any house property, and is acquiring an affordable housing residential unit with a stamp duty value of less than Rs. 45 lakh, the deduction on payment of interest is an additional amount up to Rs. 1.5 lakhs over and above the Rs. 2 lakhs available earlier.

The date for sanction of loan is extended from the outer limit of 31-Mar-2021 to 31-Mar-2022.

Extension of Date of Incorporation of Start Up for eligibility of Tax Holiday (existing scheme)

The provisions of the section 80-IAC provide for a tax holiday of 3 consecutive years out of 10 years at the option of the assessee for eligible start-ups, which are primarily those approved by the Inter Ministerial Board (and not merely registered with Start Up India)

The eligible start-up is required to be incorporated on or after 01-Apr-2016 but before 01-Apr-2021. This outer limit is now extended to 31-Mar-2022.

Similarly, section 54GB of the Act provide for exemption of long term capital gain when a person transfers a residential property or a plot of land and utilizes the consideration for subscription in
the equity shares of an eligible start-up. This benefit was available only when the transfer of property was by 31-Mar-2021. The time limit is now extended to 31-Mar-2022.

Sale of House Property at Consideration Less than 20% of Stamp Duty Value

If a transfer of residential unit takes place between 12-Nov-2020 to 30-Jun-2021 and is by way of first time allotment of residential unit to any person for a consideration not exceeding Rs. 2 crores, section 56(2)(x) of the Act would be modified in a way to take value of sales consideration as value for income tax capital gain purposes if it is not lower than 80% of the value as per stamp duty authorities.

Reducing Time Limit for Issue of Scrutiny Notice

Proposed to reduce the time limit for issue of notice under section 143(2) of the Act from 6 months to 3 months from the end of the financial year in which the return is furnished.

Also, the period of filing Belated / Revised Returns reduced from 12 to 9 months or before the completion of assessment, whichever is earlier.

Taxation of Proceeds from High Premium ULIPs

Clause (10D) of section 10 provides for the exemption for the sum received under a life insurance policy, including the sum allocated by way of bonus on such policy in respect of which the premium payable for any of the years during the terms of the policy does not exceed 10% of the actual capital sum assured. There is no cap on the amount of annual premium being paid by any person during the term of the policy.

Now, exemption under this clause shall be available only with respect to such policies where the aggregate premium whereof does not exceed Rs. 2.5 lakhs, for any of the previous years during the term of any of the policy.

Extension of Time for Getting Affordable Rental Housing Projects Approved for Tax Exemption

Section 80-IBA of the Income Tax Act provides that a business of developing and building affordable housing project shall, subject to certain conditions, be allowed a deduction of 100% of profits derived from such business if the project is approved by the competent authority after 01-Jun-2016 but on or before 31-Mar-2021. The outer time limit for 31-Mar-2021 in this section for getting the affordable housing project approved is extended to 31-Mar-2022.

You can read the conditions of such scheme here.

Tax Incentives for Units in International Financial Services Centre (IFSC)

These changes are currently applicable to Gujarat International Finance Tec-City (GIFT City). More such locations may be set up in the future.

A unit in IFSC is allowed a deduction of 100% of profits for first 5 consecutive years and 50% for the next 5 consecutive years from the year of commencement. It is now proposed to provide for 100% deduction for 10 consecutive years and also to provide that the unit may claim the said deduction, at its option, for any 10 consecutive years out of 15 years from the year of commencement.

Specified fund to include under the purview the investment division of offshore banking unit which has been granted a category III AIF registration and fulfils other conditions to be prescribed.

Any income by a non-resident as a result of transfer of non-deliverable forward contracts entered into with an offshore banking unit of IFSC which commenced operations before the 31-Mar-2024 shall be exempt.

Any income of a non-resident from royalty on account of lease of an aircraft in a previous year paid by a unit of an IFSC, if the unit is eligible for deduction under section 80LA for that previous year is exempt.

Income arising from transfer of an asset, being an aircraft or aircraft engine which was leased by a unit referred to in Section 80LA(2)(c) to a domestic company engaged in the business of operation of aircraft before such transfer shall also be eligible for 100% deduction.

Relaxing Conditions for Strategic Disinvestment by Government

It is proposed to relax the provisions of carry forward of losses and unabsorbed depreciation on demerger of public sector companies in order to facilitate strategic disinvestment by the Government and their amalgamation with private players in the future.

Dispute Resolution Committee and Faster Resolution Measures

The government shall constitute one or more Dispute Resolution Committee (DRC), which shall resolve disputes of such persons or class of person where the returned income is less than or equal to Rs. 50 lakh and the aggregate amount of variation proposed in specified order is less than Rs. 10 lakh. There will be other conditions for eligibility specified over time.

The government expects this to reduce administrative burden on small tax payers during scrutiny assessments and subsequent appeals against the Orders.

Reassessment of Income Tax matters which could be opened for the past 6 years, can now be reopened for not older than 3 years. However, for serious tax evasion cases where evasion evidence is Rs. 50 lakh or more, reopening may be done within 10 years.

Hearings at the Income Tax Tribunal may be held using faceless method over Video Conferencing, as has already been happening during the time of the pandemic.

Income Tax Settlement Commission has been discontinued.

It has been proposed that the time limit for completion of assessment proceedings may be reduced by three months. Thus the time for completing of assessment is proposed to be 9 months from the end of the assessment year in which the income was first assessable, for the AY 2021-22 and thereon.

Clarification on Applicability of 2% Equalization Levy on E-Commerce Operators

Consideration received or receivable for specified services for e-commerce supply or services shall not include consideration which are taxable as royalty or fees for technical services in India.

For the purposes of defining e-commerce supply or service, online sale of goods and online provision of services shall include one or more of the following activities taking place online:
(a) Acceptance of offer for sale;
(b) Placing the purchase order;
(c) Acceptance of the Purchase order;
(d) Payment of consideration; or
(e) Supply of goods or provision of services, partly or wholly

Further, consideration received or receivable from e-commerce supply or services shall include:
(i) consideration for sale of goods irrespective of whether the e-commerce operator owns the goods; and
(ii) consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.

Goodwill is Not a Depreciable Asset (amendment after Supreme Court's Decision against such stand)

It has been decided to propose that goodwill of a business or profession will not be considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation.

In a case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains under section 48 of the Act subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the assessment year 2021-22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill. 

Clarifying that Section 44ADA not applicable to LLPs

Proposed to amend section 44ADA(1) to provide that the provision of presumptive income of at least 50% for professional receipts not exceeding Rs. 50 lakhs in a financial year shall apply to an assessee, being an individual, HUF or partnership firm, not being an LLP.

Change in Custom Tariffs

The change in rate of Basic Customs Duty w.e.f. 02-Feb-2021 can be checked on Page 84 of the Memorandum, linked here. It is page 86 of the pdf file.

Rates on certain parts of automobiles have been increased from 10% to 15%. Includes Relays, Electric Motors, etc.

There is also imposition of Agriculture Infrastructure and Development Cess on import of certain items as specified from page 92 and onwards. 


The Memorandum to the Finance Bill is linked here.