Direct Taxes – Budget Highlights

The Union Budget has been presented in the back drop of major economies experiencing moderation of growth, impacted by the pandemic, risk of economic recession in major economies and global uncertainties. India, in contrast, has stood out with growth rate of around 7%, which is the highest amongst the major economies. To address the risks tempering India’s growth, the Government’s strategy includes inclusive budgetary reforms, making India Atmanirbhar and attaining macro-economic stability.

On the Direct tax front, there seems to be an effort to make the new tax regime as the default regime by making it attractive. For the new tax regime, the rebate limit has been raised from H 5 lakhs to H 7 lakhs and the tax slabs have been rationalised with basic exemption limit hiked to H 3 lakhs. Standard deduction is now allowed under the new regime. At the top end, the maximum effective tax rate has been reduced from 42.74% to 39%. Average processing time of returns is proposed to be reduced from 93 days to 16 days. The deposit limit for the post office monthly schemes has been enhanced to H 9 lakhs from H 4.5 lakhs for a single account and to H 15 lakhs from H 9 lakhs for a joint account. Further, the deposit limit for senior citizen savings scheme has been enhanced from H 15 lakhs to H 30 lakhs.

Tax Rates

Old Tax regime

• Old tax regime with no changes in tax rates and slabs have been continued.

New tax regime

• New tax regime has become the default regime with an option to be exercised for continuing with old regime.
• Number of slabs in new tax regime have been reduced and the minimum threshold for taxable limit has been increased from H 2.5 lakhs to H 3 lakhs. Standard deduction of H 50,000 and deduction for family pension against salary has been considered allowable.
• Rebate for tax exemption increased from H 5 lakhs to H 7 lakhs.
• Highest surcharge rate reduced from 37% to 25%.
• It is proposed to provide a concessional tax of 15% to be levied for co-operative societies set up on or after April 01, 2023 engaged in manufacturing operations commencing operations on or before March 31, 2024.

Business Income

• It is proposed to insert clause (h) in Section 43B prescribing that payment to MSMEs shall only be allowed as business
  expenditure on actual payment basis.
• Section 79 has been proposed to be amended to increase the time period for carry forward of loss of eligible startups from 7 years to 10 years from date of incorporation.
• It is proposed to define Strategic divestment U/s Section 72A to mean the transfer of shareholding/ control by Central Govt, State Govt or a public sector company and amend Section 72AA dealing with amalgamation of one or more banking company with any other banking institution or a company to facilitate carry forward of losses and depreciation subsequent to a strategic disinvestment, if amalgamation takes place within 5 years of strategic disinvestment.
• The threshold limits for presumptive scheme of taxation for eligible businesses has been increased from H 2 crores to
  H 3 crores and for specified profession from H 50 lakhs to H 75 lakhs.
• A new sub-section to section 44BB and 44BBB dealing with services provided by non-residents in connection to extraction or production of minerals oils etc. and section 44BBB dealing with profit of a foreign company engaged in business of civil constructions etc. has been modified to provide that no set off of unabsorbed depreciation and brought forward loss shall be allowed under presumptive taxation in the previous year where presumptive taxation has been opted.
• The restriction on deduction of interest expense to the extent of 30% of EBIDA in respect of debts by non-residents which are associated enterprises of the borrower being not applicable to banking or insurance companies, have also not been made applicable to NBFC’s.

Capital Gain

• It is proposed to insert new clause in section 47 to provide that conversion of Gold into Electronic Gold receipts (EGR)
  and vice versa shall not be considered as transfer.
• Exemption limit for claiming roll over benefit in relation to investment made in residential house under section 54 and 54F of the Income Tax Act has been capped to H 10 crores.
• It is proposed to insert a new section 50AA in the Act to tax the capital gains arising from the transfer or redemption or maturity of Market linked Debentures as Short Term Capital Gain at applicable rates.

Income from Other Sources

• Section 56(2)(vii)(b) now to be applicable incase of inadequate consideration for issue of shares from any person (nonresident also) irrespective of residential status.

Deductions and Exemptions

• Cut-off date for incorporation in case of start-ups availing 100% deduction of the profit in eligible cases under section 80-IA has been extended up to March 31, 2024.
• It is proposed to insert new Section 80CCH to provide deduction for the amount deposited into Agniveer corpus Fund by the central government and Agniveer individuals enrolled under Agnipath scheme 2022.
• Section 10(4E), to be amended to provide exemption to any income distributed to non-resident holder of offshore
  derivative instruments by IFSC banking unit.

Charitable Trust

• Application of fund out of corpus or borrowings before April 01, 2021 are not to be allowed for charitable or religious
  purposes when such amounts are deposited back or invested to corpus or when the loan or borrowing is repaid.
• Repayment of loan or investment/depositing back into corpus shall be considered an application for charitable or religious purpose only within 5 years of application thereof from corpus or loan.
• Sections 10(23C) and 11 to restrict the exempted application by charitable trusts and institutions on donations made to other charitable trusts and institutions to the extent of 85% of the income;
• To claim accumulation of income, the trust or institution shall file Form 9A/10 at least two months before the due date of filing of return of income.
• The exemption u/s 10(23C), 11 and 12 will be available only if the return of income has been furnished within the time allowed u/s 139.

TDS, Returns and Assessment Proceedings

• Deployment of Joint Commissioners (Appeals) for disposal of small appeals in order to reduce the pendency of appeals at CIT(A).
• It is proposed to amend Section 142 to empower Assessing Officer to direct the assessee for Inventory valuation by a Cost Accountant.
• Relevant provisions of section 132 to be amended to provide the authorized officer to requisition the services of any other person or entity for the purposes of the search and registered valuer to estimate value of the assets as prescribed.
• Section 170A to be substituted to provide that in the event of a business reorganization, the successor shall furnish a modified return within 6 months from the end of the month in which the said order was issued.
• The time for completion of assessment shall be increased to twelve months as against nine months as specified earlier from the end of the AY in which the income was first assessable.
• A new sub-section (3A) may be inserted in section 153 of the Act to provide that the period available for completion of assessment or reassessment which was pending on the date of search or requisition shall be extended by twelve months.
• The time period to furnish transfer pricing documentation is proposed to be reduced from 30 days to 10 days. The transfer pricing officer may extend the same by another 30 days at his or her discretion.
• TDS u/s 196A in respect of Non-resident against Income from units of mutual funds as specified would be the lower of 20% or the rate provided in DTAA.
• TDS will be deducted on the accumulated balance due to an employee under Employees’ Provident Fund Scheme, 1952 at the rate of 20% as per section 206AA where the PAN has not been furnished by the employees.
• Increase in limit of cash withdrawal from H 1 crores to H 3 crores for withholding of tax on such withdrawals by cooperative society.
• Section 197(1) of the Act to be amended to provide that the certificate for deduction at lower rate u/s 194LBA in respect of income distributed by a business trust to its unit holders can be obtained by the non-resident assessee.
• It has been proposed to increase the rate of TCS u/s 206C for remittance through Liberalised remittance scheme (LRS) and on sale of overseas tour package and certain other cases out of India from 5% to 20%.
• TDS on net winnings income from online gaming to be levied at the time of withdrawal or at the end of the financial year.

Miscellaneous

• Section 269SS and 269T of the Act to be amended to increase the limit of H 20,000 for loan and deposits in cash to H 2 lakhs in case of Primary Agricultural Credit Societies (“PACS”) and Primary Co-Operative Agricultural and Rural Development Bank (“PCARD”).
• Clause (viii) of sec 9(1) to be amended to extend this deeming provision to sum of money exceeding fifty thousand rupees received by a not ordinarily resident without consideration from a resident in India being taxable as Income from other sources.
• Exemption u/s 10(22B) in respect of income of a notified news agency to be withdrawn.
• Amount received from Insurance Policies where aggregate of premium for life insurance policies (other than ULIP), issued on or after April 01, 2023, is above H 5 lakhs shall be taxable as Income from Other Sources.