RATIONALE OF DIRECT TAX PROPOSALS IN THE UNION BUDGET 2019
The union budget presented on July 5, 2019 aim to commit towards promoting digital India, encouraging startups hub, transforming rural lives, strengthen taxation regime and connectivity infrastructure of the country.
There were several paramount proposals were recommended in case of direct taxation by finance minister, Nirmala Sitharaman. Mostly aimed at boosting the compliance process, increasing the taxation reach, transparency and clear rationalization of provisions.
Among others, the major direct taxation proposals in the budget includes widening the scope of taxation, promoting cash less economy, rationalization of provisions, tax incentives, improving effectiveness of tax administration and removing of difficulties of tax payers in order to ease the process of doing business.
Here are discussed the key proposals and the prime rationale of such proposed amendments in the direct taxation.
TDS regarding purchase of immovable property.
The phrase 'consideration for immovable property' is currently not defined for the purposes of section 194IA. The section 194IA is concerning the payment on transfer of certain immovable property other than agricultural land and provides for levy of TDS at the rate of one per cent on the amount of consideration paid or credited for transfer of such property.
It was observed during the transactions of purchase of immovable property, that the sale consideration also included other types of payments that buyer was made to pay. For instance, payments like car parking, club membership fee, electricity and water facility fees, maintenance fee, advance fee etc.
Thus, explanation to this section is proposed to be amended and defining the term "consideration for immovable property" to include all charges of the nature of club membership fee, car parking fee, electricity and water facility fees, maintenance fee, advance fee or any other charges of similar nature, which are incidental to transfer of the immovable property.
Hence, all such charges shall be added to the cost of buying property while deducting the tax at source.
TDS on cash withdrawals
The prime focus of this union budget presented was to promote digital transactions and discourage the use of cash in the economy. This will also regulate the circulation of black money in the economy.
There are substantial amount of cash withdrawals in a year by the persons maintaining accounts in a banking company or cooperative bank or a post office. In order to ensure that such amounts do not make out its way from the taxation, TDS is proposed to be levied.
A new section 194N is to be inserted to provide the levy of TDS at 2% on cash withdrawal by a person in excess of Rs. 1 crore in a year from a banking company or cooperative bank or post office. However, payments made to recipients such as the Government, banking company, cooperative society engaged in carrying on the business of banking, post office, banking correspondents and white label ATM operators, who are involved in the handling of substantial amounts of cash as a part of their business operation, from the application of this provision are proposed to exempt from the TDS levy.
The proposed provision is created to discourage cash transactions and promote cash less economy.
Compulsion of accepting payments through prescribed electronic modes.
A new section 268SU is proposed to be inserted to reduce generation and circulation of black money and encouraging digital and cashless economy. The said section shall provide that every person carrying on business having total sales, turnover or gross receipts exceeding the amount of fifty crore rupees during the immediately preceding previous year is require to provide the facility for accepting payment through the prescribed electronic modes.
Moreover, a new penalty section 271DB shall also be inserted to provide a penalty of a sum of five thousand rupees, for every day during which such failure continues.
TDS on payments made by individual or HUF to a resident contractors and professionals.
Before the amendment proposal, the provisions of TDS were not applicable on an individual or HUF if payment is made to a resident contractor or professional for a personal use or even for the purpose of business or profession, where such business or profession were not subjected to audit. Thus, it made way to the possible scenario of tax evasion and escaping of taxable amount.
A new section 194M is proposed to be inserted to provide the levy of TDS at the rate of 5% if the annual payment made to a contractor or professional exceeds Rs. 50 lakh in a year. It is also proposed that such individual and HUFs shall not be required to obtain TAN but shall be able to pay tax using their PAN.
This proposed amendment shall clearly widen the tax base and ensure that no amount which is exceeds the reasonable amount gets away from the tax bracket.
Powers of Assessing officer concerning the modified return of income pursuant to Advance Pricing Agreement (APA)
The provisions of section 92D provides for situations where assessment or re-assessment has already been completed, before the expiry of the time allowed for filing of modified return.
The words "assess or reassess or recompute", give an apprehension that the assessing officer may start fresh assessment or reassessment in respect of completed assessments or reassessments of the assessees who have modified their returns of income in accordance with the APA entered into by them. But the intention of the legislature is for assessing officer to merely modify the total income consequent to modification of return of income in pursuance to APA.
Section 92CD(3) is thus proposed to amended to clarify that where the assessment or reassessment has already been completed and modified return of income has been filed by the tax payer, the assessing officers shall pass an order modifying the total income of the relevant assessment year determined in such assessment or reassessment in accordance with the APA.
TDS on non-exempt portion of life insurance pay-out on net basis.
It was observed that various issues have been expressed on the complications of deduction of tax on gross amount where the assessee has to pay tax on the net income. In other words, the deduction of insurance premium paid from the total sum received.
Hence, it is proposed to deduct tax on net income in order to ensure that the income as per TDS return of the deductor is matched automatically with the return of income filed by the assessee.
Currently, the TDS is deducted at the rate of one per cent of any sum to a resident under a life insurance policy which is not exempt. It is also proposed that tax is to be deducted at the rate of five per cent on income component of the sum paid by the person.
Incentives concerning the NBFCs
The interest income of bad or doubtful debts received by certain institutions or banks or corporations or companies, is chargeable to tax in the previous year in which it is credited or is actually received, whichever is earlier. The certain institutions do not include NBFC companies and hence to benefit adequately regulated NBFCs, section 43D is proposed to be amended.
The deposit-taking NBFCs and systemically important non deposit-taking NBFCs are hence to be brought under the scope of the section 43D. Accordingly, section 43B is also proposed to amend to include that amount payable by the assessee as interest on any loan or advances from a deposit-taking NBFCs and systemically important non deposit-taking NBFCs to be allowed as deduction where it is paid on or before the due date of furnishing the return of income of the relevant previous year.
Incentives to International Financial Service Centre (IFSC)
The budget has proposed varied tax benefits to promote the growth of International Financial Service Centre (IFSC).
· In order to ensure tax neutral transfer of certain securities by Category III Alternative Investment Fund (AIF) in IFSC, section 47 is proposed to be amended. It shall provide that any transfer of a capital asset specified in the said clause by such AIF of which all the unit holders are non-resident are not regarded as transfer subject to fulfillment of specified conditions.
· In order to expedite the external borrowings by the units in IFSC, section 10 is proposed to be amended. It shall provide the exemption of any income by way of interest payable to a non-resident by a unit located in IFSC in respect of monies borrowed by it on or after 1st day of September, 2019.
· In order to encourage distribution of dividend by companies operating in IFSC, section 115O is proposed to be amended. It shall provide that any dividend paid out of accumulated income derived from operations in IFSC after 1st April 2017 shall not be liable for tax on distributed profits.
· In order to boost relocation of mutual fund in IFSC, section 115R is proposed to be amended. It shall provide that no additional income-tax shall be chargeable in respect of any amount of income distributed on or after the 1st day of September, 2019 by a mutual fund of which all the unit holders are non-residents and which fulfills certain other specified conditions.
· The current provisions of section 80LA provides for profit linked deduction of an amount equal to one hundred per cent of income for the first five consecutive assessment years and fifty per cent of income for the next five consecutive assessment years, to units of an IFSC.
In order to further benefit the units in IFSC, it is proposed to amend the section to increase the deduction to one hundred per cent for any ten consecutive years. The assessee shall have the option to claim the said deduction for any ten consecutive assessment years out of fifteen years beginning with the year in which the necessary permission was obtained.
· The provisions of sub section (4) of section 115A disallow any deduction under chapter VIA which includes section 80LA. Where, section 80LA provides for deduction in respect of certain incomes to a unit located in an IFSC.
In order to make sure that units located in IFSC claim full deduction, it is proposed to amend section 115A so as to provide that the conditions contained in sub-section (4) of section 115A shall not apply to a unit of an IFSC for under section 80LA is allowed.
Tax Incentives for affordable Housing
Presently, a deduction of an amount equal to hundred per cent of the profits and gains derived from the business of developing and building housing projects is allowed where the gross total income of an assessee includes any profits and gains derived from such business.
In order to modify certain conditions regarding the housing project approved on or after 1st day of September, 2019, the section 80IBA is proposed to be amended. The conditions modified are:
· The deduction shall be available if a residential unit in the housing project have carpet area not exceeding 60 square meter in metropolitan cities or 90 square meter in cities or towns other than metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region).
· It is also proposed that the stamp duty value of such residential unit in the housing project shall not exceed forty five lakh rupees.
Incentives for Startups
This union budget proposed lot of benefits for the startups and to promote their business in the country. The setting up of exclusive TV programme for the startups is an exceptional step to encourage the startup hub. Moreover, the angel tax issue has been addressed and the startups shall face no scrutiny in respect of valuation of share premiums upon furnishing of required declarations and returns.
· The eligible startup companies are allowed to carry forward their business and losses if all the shareholders who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold all those shares. Moreover, such loss was incurred during the period of seven years beginning from the year in which such company is incorporated.
The provisions of the section 79 are inconvenient to the startups in few situations as compared to the other closely held companies. Thus, to further encourage ease of doing business by eligible startups, amendment in section 79 is proposed.
The amendment provides that closely held eligible start-up are required to fulfill two conditions in order to carry forward and set off the losses against the income of the previous year. The two conditions include continuity of holding fifty one percent shareholding and the same shareholders.
· At present the benefit of section 54GB is only available for investment in the equity shares of eligible start-ups and that period also ended on 31st March 2019. Thus, no benefit is available for residential property transferred after 31st March 2019.
Thus, following amendments has been proposed in the union budget:
§ Extension of sun set date of transfer of residential property for investment in eligible start-ups from 31st March 2019 to 31st March 2021.
§ Relaxation in respect of the minimum shareholding from fifty per cent share capital or voting rights to twenty five per cent.
§ Relaxation of the condition of restricting transfer of new asset being computer or computer software from current five years to the period of three years.
Registration cancellation of Trust or Institution.
The provisions of section 12AA provides for the cancellation of registration in cases where the activities of the trust or institution are not genuine or are not being carried out in accordance with its objects and the activities are being carried out in such a manner that either whole or part of its income would cease to be exempt.
To make sure that the trusts or institution does not drift from their projects, amendment in section 12AA is proposed to be made. As per the amendment, the registration of the trusts or institutions shall be cancelled in the following scenarios:
· If it is noticed that it has violated any requirements of any other law which was material for the purpose of achieving its objects.
· If the order, direction or decree, holding such violation has occurred and has either not been disputed or has attained finality.
All the direct tax proposals in the union budget were notable and favorable for the tax payers. The other proposals for instance interchanging of Pan and Aadhaar, unchanged personal tax slabs, additional income tax deduction in case of interest paid on loans, incentives for National Pension scheme and others shall ease out the tax management process of the tax payers. Moreover, it shall facilitate the tax administration and strengthen the compliance provisions.
Now, taxpayers shall anticipate the timely enforcement of these proposals.
Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.
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