The Union Finance Minister Ms.Nirmala Sitharaman has presented the budget for the year 2023-24, the last full budget before the 2024 polls. Various amendments have been proposed for the taxpayers specifically the middle and the salaried class such as altering the tax slabs and increase of rebate for taxpayers paying tax under the new tax regime.
Major direct-tax amendments as proposed in Finance Bill, 2023 are as follows:
1. Rates of Income-tax
A. Old regime
The slabs and rates of tax along with rebated under section 87A in case of individuals and HUF stand unchanged. The changes in slabs, rate and rebate have only been proposed in case certain persons opting to pay tax under the new regime.
B. New Regime (Section 115BAC)
From Assessment Year 2021-22 to 2023-24
Total Income of an individual or HUF (in Rs.)
Rate of tax
Up to 2,50,000
From 2,50,001 to 5,00,000
From 5,00,001 to 7,50,000
From 7,50,001 to 10,00,000
From 10,00,001 to 12,50,000
From 12,50,001 to 15,00,000
For Assessment Year 2024-25
Total Income of an individual or Hindu Undivided Family or AOP [other than a cooperative
society], or Body of individuals or an artificial juridical
person (in Rs.)
Rates of tax as specified in sub-section (1A) proposed to be inserted in Section 115BAC
From 3,00,001 to 6,00,000
From 6,00,001 to 9,00,000
From 9,00,001 to 12,00,000
From 12,00,001 to 15,00,000
Currently, the super-rich and the High Net-Worth Individuals (HNIs) whose taxable income is above Rs. 5 crores, are required to pay a surcharge of 37%. The same is proposed to be reduced to 25%. However, the said reduction in surcharge is only applicable for individuals who pay tax under the new regime and the effective tax rate for these individuals which was earlier 42.74% is reduced to 39%. The surcharge rate of 37% for individuals paying tax under the old regime and having income above Rs. 5 crores remains unchanged.
2. Rebate under section 87A of the Income Tax Act, 1961 (‘Act’)
Rebate under section 87A of the Act can be claimed when taxable income does not exceed the prespecified limit for the given financial year. Under the present regime, an assessee, being an individual resident in India, having total income upto Rs 5 lakh, is provided a rebate of 100 per cent of the amount of income-tax payable i.e., an individual having income till Rs. 5 lakh is not required to pay any income-tax.
From assessment year 2024-25 onwards, an assessee, being an individual resident in India who pays tax under the new regime as specified in sub-section (1A) of section 115BAC, shall now be entitled to a rebate of 100 per cent of the amount of income-tax payable on a total income not exceeding Rs. 7 lakh. Pertinently, this benefit of a higher rebate is only available to a resident individual paying tax under the new regime and accordingly, if an individual opts to pay tax under the old regime, he shall be eligible for 100% rebate under section 87A only if the total income is upto Rs. 5 lakh.
3. Increasing threshold limits for presumptive taxation schemes
Section 44AD was introduced to give relief to the small taxpayers from maintaining books of accounts who have turnover of less than Rs 2 crores (amended to 5 crores subject to minimum criteria of digital transaction in budget 2020). Under the presumptive scheme, the taxpayer is allowed to presume the minimum profits at prescribed rate of the total turnover and is relieved from maintaining books and getting them audited.
Similarly, Section 44ADA of the Act provides for presumptive taxation or professionals. This scheme applies to certain resident assessees (i.e., an individual, partnership firm) who are engaged in any profession referred to in sub-section (1) of section 44AA, and whose total gross receipts do not exceed Rs. 50 lakh in a previous year. Under this scheme, a sum equal to 50% of the gross receipts is deemed to be the profits and gains from profession and the assessee is relieved from the maintenance and audit of his books of account.
In order to encourage the assessees to conduct their business through digital transactions or banking channels and lessen their compliance burden, the following amendments have been proposed:
- under section 44AD of the Act, for eligible businesses, where the cash receipts from said business is upto 5% of the total turnover, a threshold limit of Rs. 3 crore (earlier restricted to Rs. 2 crore) will apply. The assessee will be able to take benefit of presumptive scheme if his turnover does not exceed Rs. 3 Crores and the cash receipts are not more than 5% of the total turnover.
- under section 44ADA of the Act, for professions referred to in sub-section (1) of section 44AA of the Act, where the cash receipts in a financial year do not exceed 5% of the total receipts, a threshold limit of Rs. 75 lakh (earlier restricted to Rs. 50 Lakhs) will apply. The assessee will be able to take benefit of presumptive scheme under section 44ADA if his receipts does not exceed Rs. 75 Lakhs and his professional receipts in cash are restricted to 5% of the total receipts.
It has been further provided that any receipts through a cheque or bank draft which is not account payee shall be deemed to be received in cash and hence, will be considered to compute the aforesaid 5% limit.
In our view, this is a beneficial amendment and will provide relief to all stakeholders. Raising these thresholds will ease the compliances for medium-class business owners and tax professionals and is a prominent move to promote the ease of doing business in India. Also, a large section of professionals including Advocates and Chartered Accountants will also benefit from this amendment.
4. Section 43B - Promoting timely payments to Micro and Small Enterprises
The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of delayed payment to Micro and Small Enterprise (MSEs). (Section 15- 24)
Section 43B of the Act provides for certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income.
In order 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. However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments. This proposal shall boost the MSMEs sector.
5. Benefit to eligible start-up
Section 80-IAC provides for Special provision in respect of specified business. Act provides for 100% tax deduction to an eligible startup on profits and gains derived from an eligible business for 3 consecutive years out of 7 years. In Union Budget, 2020, the finance minister, considering that start-ups incur losses in earlier years, increased the scope of claiming such tax holiday under section 80-IAC to three out of ten years. The Union Budget, 2020 also expanded the scope of coverage for an eligible startup for availing the tax holiday, by increasing the turnover limit to INR 100 crores from the current INR 25 crores. Earlier, this benefit was subject to the fact that start-up is incorporated on or after 01.04.2016 but before 01.04.2023. To further promote the start-ups in India, it is proposed to amend the provisions of section 80-IAC to extend the period of incorporation of eligible start-ups to 01.04.2024.
6. Restricting the deduction under Section 54 and 54F of the Act in case of buying expensive properties
Currently, Section 54 and 54F provide deduction from long-term capital gains, in case an individual or a HUF reinvests the sale proceeds in a residential house. It has been observed that high deductions were being claimed by HNI’s by investing the sale proceeds in expensive residential houses. To prevent this claim of deduction for buying expensive houses and restoring the intent of providing these deductions to middle-class taxpayers, both the provisions have been amended to provide that if the cost of the residential house in which proceeds are reinvested is more than Rs. 10 crores, the cost shall be deemed to be Rs. 10 crores. Also, for the purpose of investment in Capital Gains Account Scheme (CGAS), capital gains exceeding Rs. 10 crores shall not be considered.
7. Rationalisation of exempt income under LIC- Section 10(10D)
The following amendments have been proposed in the Act to restrict the exemption in case of life insurance policies where premium contributions are large:
• 6th and 7th provisos are inserted in Section 10(10D) to provide that if premium in respect of a life insurance policy [other than Unit Linked Insurance Plan (ULIP) issued after 01.04.2023 exceeds Rs. 5 Lakhs, then the receiver of life insurance benefits shall not be eligible for exemption under Section 10(10D). Also, in case of more than one such policies, premium amounts shall be aggregated for computing the said 5 lakh limit. However, the aforesaid provisos shall not be applicable in case of death of a person and the beneficiary receiving the lump sum amount can avail the exemption under Section 10(10D) even if the premium exceeded the Rs. 5 Lakh threshold.
• Section 2(24) which provides for definition of ‘income’ and Section 56(2) which deals with income from other sources are also proposed to be amended to provide that the sum received on maturity of the above-mentioned policies i.e., policies other than ULIP having premium exceeding Rs. 5 lakhs, shall form part of the income of the assessee.
8. Decriminalising of offences pertaining to a liquidator (Section 276A)
Section 276A of the Act makes provision for prosecution with rigorous imprisonment up to two years in the case of a person, being a liquidator who fails to give notice in accordance with subsection (1) of section 178 of the Act , or fails to set aside the amount as required by sub- section (3) of the said section or parts with any of the assets of the company or the properties in contravention of the provisions of the section.
Section 276A provides for prosecution of liquidators for non-compliance with section 178. Section also imposes personal liability on such liquidators for the same non-compliance. The proposal has been made by the Central Government to amend Section 276A by providing a sunset clause of 31.03.2023 on the Section. The proposal has brought the change that no fresh prosecution shall be launched on the liquidator on or after 1st April, 2023. The earlier prosecutions will however continue to take place and the proposed amendment will take effect from 1st April, 2023. In our view, this is a big relief to the liquidators who were earlier being exposed to personal liability and prosecutions. This will ensure that Liquidators perform their duties with all fairness being unimpacted by any prejudices or biases.
9. Amendments in relation to unit holders of a business trust
In the current law, for incomes in the nature of interest, dividend, rental income, etc. business trusts have been granted a pass-through status and the same are taxable in the hands of unit-holders. However, certain distribution such as repayment of debt, do not suffer taxation either in the hands of business trust or in the hands of the unit holders. To tax the same, it has been proposed that any sum received by a unit holder from the business trust, other than income specified in clause (23FC) or (23FCA) of Section 10 and which is not chargeable to tax in the hands of business trust under Section 115UA, shall be chargeable to tax as other sources in the hands of unit holder under section 56(2)(xii). However, in case the receipt relates to redemption of units, the unit-holder shall be allowed a deduction of the cost of acquisition. Amendments are also proposed in Section 115U to state that the provisions of the said section shall not apply in respect of a sum which is chargeable to tax under section 56(2)(xii).
Further, earlier, the unit holders who received income from a business trust were subject for a withholding under Section 194LBA but couldn’t opt for a lower or no deduction certificate under Section 197. Now, Section 197 is proposed to be amended to provide that even for the nature of income specified in Section 194LBA, a unit holder can apply for a low or no deduction certificate.
10. Appeal mechanism under Section 253 in terms of filing appeal or cross-objection before the Income Tax Appellate Tribunal
Section 253 of the Act contains detailed provisions relating to filing of appeals to the Income Tax Appellate Tribunal. Sub-section (1) details with the types of orders passed under various Sections of the Act, against which an aggrieved Assessee may prefer an appeal to the Income Tax Appellate Tribunal.
Section 253(4) of the Act allows the Respondent in an appeal, against an order of the Commissioner (Appeals), to file a memorandum of cross-objections before the Appellate Tribunal. It is important to note that the Section itself states that such memorandum of cross-objections is to be determined and disposed off by the Income Tax Appellate Tribunal as if it were an appeal filed. Hence, memorandum of cross-objections, in practical terms is regarded as an independent appeal. Section 253(4) and (5) also state that though memorandum of cross-objections is to be filed within 30 days, the Income Tax Appellate Tribunal also like in cases of appeal, even in memorandum of cross-objections, has the power to condone the delay.
Section 253(4) however, states that the Assessing Officer (AO) or the assessee may file memorandum of cross-objections against the order of Commissioner (Appeals). However, it is pertinent to note here that appeal can be made to the Income Tax Appellate Tribunal against orders of authorities other than Commissioner (Appeals) also, like Principal Commissioner or Commissioner or Principal Director or Director etc. As a result, the Respondent, whether it is Revenue or the Assessee, cannot file memorandum of cross-objections against an appeal before the Income Tax Appellate Tribunal by virtue of the existing provisions which states that the AO or the Assessee may file memorandum of cross-objections against the order of Commissioner (Appeals) only. This creates grievances as well as reduces the fair and equitable dispensation of judgement in such cases. Hence, an amendment is being brought to enable filing of memorandum of cross-objections in all classes of cases against which appeal can be made to the Income Tax Appellate Tribunal against any order and not restricted to order of Commissioner (Appeals) only.
However, the example given in the Memorandum Explaining the provisions in the Finance Bill, 2023 is rather a confusing one as it states that when an Assessee files an appeal to the Income Tax Appellate Tribunal against an order passed by the AO in consequence of an order of the Dispute Resolution Panel, the AO would be able to file a cross objection to such appeal which cannot be filed presently.
In our view, this is likely to create a lot of confusion and also litigation as at present the relief given by the Dispute Resolution Panel and the directions issued by the Dispute Resolution Panel are binding on the AO and no appeal can be filed by the AO against the same. This issue whether AO can file an appeal against the directions issued by the Dispute Resolution Panel has been subject-matter of a lot of debate in the past and amendments have also been withdrawn to enable and provide relief to the MNCs whose cases go to the Dispute Resolution Panel. Since, memorandum of cross-objections is treated and is to be disposed off as if an appeal is filed by the AO, this again is likely to create litigation as well. If the AOs are permitted to file memorandum of cross-objections in Income Tax Appellate Tribunal against the directions of Dispute Resolution Panel, the relief provided to MNCs by the Dispute Resolution Panel, will against become subject-matter of litigation and increase the on-going litigation. It has been stated that this amendment will take effect from the 1st day of April, 2023.
11. Penalty and prosecution provisions pursuant to non-adherence of Section 194R (TDS on benefit or perquisite in respect of business or profession) and Section 194S (TDS on Virtual-Digital Assets)
As everyone is aware, last year Section 194R and Section 194S have been introduced by Finance Act, 2022. Section 194R refers to deduction of TDS on any benefit or perquisite given in respect of business or profession given to a resident and Section 194S refers to TDS on Virtual-Digital Assets. In order to clarify the position and presently, the provisions for penalty and prosecution do not clearly mandate penalty or prosecution for a person who does not pay or fails to ensure compliance to the said Sections, relevant amendments have been incorporated.
These amendments clearly show the intent of the Government, which is to ensure highest level of compliance and adherence to Section 194R and Section 194S. All Assessess need to be vigilant and cannot take these provisions lightly. Section 271C is proposed to be amended to state that where a person fails to pay or ensure payment as required under Section 194R and Section 194S, then Section 271C which is a penalty provision, can get attracted. Section 276B refers to prosecution and corresponding amendments for non-compliance of Section 194R and Section 194S have been proposed in prosecution provisions as well. These amendments will take effect from the lst day of April, 2023.
12. Amendment in refund provisions
The provisions relating to issuance of refund by the Income Tax Department has always been subject to a lot of litigation, controversies, and amendments as well.
Section 241A of the Act was introduced from AY 2017-18 which stated that during the pendency of assessment proceedings, if required, the refund for the concerned Assessment Year can be withheld. Courts interpreted Section 241A to state that Section 241A orders cannot be passed in a mechanical and a routine manner. Refunds cannot be withheld just because the notice under Section 143(2) of the Act has been issued and the Respondents want to verify the claim. It was often seen that generic orders were passed and no attempt was made by the Respondents to substantiate how the grant of the refund is likely to adversely affect the Revenue and the Courts were passing assessee-favouring orders. In view of this, Section 241A is being withdrawn and instead amendments are being introduced in Section 245.
However, in our opinion, the power to withhold the refund in Section 245 in view of the proposed amendments is much wider as it not only refers to pending assessment proceedings but also pending reassessment proceedings. It states that where the AO, having regard to the fact that proceedings of assessment or reassessment are pending in such case and grant of refund is likely to adversely affect the revenue, and for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, may withhold the refund till the date on which such assessment or reassessment is made. Hence, though the language is similar to Section 241A, yet the ambit has been widened and now the Income Tax Department can withhold the refund even in reassessment proceedings which were not permitted in Section 241A of the Act. Further, it seems that the refund need not pertain to the same Assessment Year and a co-joint reading Section 245(1) and Section 245(2) shows that refund for any Assessment Year can be withheld when there are on-going and pending assessment proceedings and reassessment proceedings. This is again much wider than Section 241A which permitted withholding of refund for only the same Assessment Year. This will definitely impact liquidity and working capital of many taxpayers and taxpayers may have to struggle further in terms of getting their refunds from the Income Tax Department now.
13. Introduction of the authority of Joint Commissioner (Appeals)
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. In order to clear this bottleneck, a new authority for appeals is being proposed to be created at Joint Commissioner/ Additional Commissioner level to handle certain class of cases involving small amount of disputed demand. Such authority shall have all the powers, responsibilities and accountability similar to that of Commissioner (Appeals) with respect to the procedure for disposal of appeals. Hence, this is being introduced from 01.04.2023. A lot of relevant provisions have been amended to ensure the implementation of the same.
However, in our view, this is likely to create further confusion and delay and add on to the pendency for multiple reasons. The provisions state that the existing matters from Commissioner (Appeals) can be transferred to Joint Commissioner/ Additional Commissioner level and even the vice-versa is possible. In such a situation, an opportunity of hearing is to be granted to the Assessee. Further, the Central Board of Direct Taxes or an Income Tax Authority will decide which cases are to be transferred and these provisions will apply to which category of Assessees. This shows that such procedural aspects can further delay the effective hearing and closing of matters. Furthermore, it can also be challenged on the ground of excessive delegated legislation.
It is also often seen that Joint Commissioner/ Additional Commissioner undertaken powers of an Assessing Officer. In fact, there are specific provisions in the Act wherein Joint Commissioner/ Additional Commissioner can be authorised and empowered to act as the Assessing Officer. Hence, the larger question which remains to be answered is when the office of Joint Commissioner/ Additional Commissioner can act as an Assessing Officer, then can the same office have the powers of an Appellate Body as well which sits over in appeal and adjudicates on the order of the Assessing Officer. In law, it is to be noted that very wide powers are given to the First Appellate Body/Forum and their powers are co-terminus to the powers of Assessing Officer. They have the power to delete the addition, they have the power to confirm/reduce/annul the assessment or even enhance the addition and also confirm/cancel the penalty or enhance/reduce the penalty. Given the wide ambit of powers given to the office of First Appellate Body/Forum, the larger question is whether the office of Joint Commissioner/ Additional Commissioner can undertake such a responsibility in a fair/neutral and transparent manner. A challenge to this in the Constitutional Courts is quite possible.
14. Reducing the time provided for furnishing Transfer Pricing (TP) report
92D of the Act, inter-alia, provides that every person who has entered into an international transaction or a specified domestic transaction shall keep and maintain the information and documents as provided under rule 10D of the Income-tax Rules, 1962 (the Rules).
In our view, the TP report is often an important and a crucial document for Companies in view of the on-going TP assessments and also the TP litigation at present. The stand taken by the taxpayer in TP report is often an important starting point for the purposes of determining and analysing the international transactions and also the arm’s length price.
As per Section 92D of the Act, the Assessing Officer (AOs) or the Commissioner (Appeals) may during the course of any proceedings under the Act require such person to furnish any information or document, within a period of 30 days from the date of receipt of a notice issued in this regard which may be extended by an additional period of 30 days.
This time is now being reduced in view of the understanding that this information is already in possession of the Assessee. This amendment will take effect from 1st April, 2023 and states that the initial time period is now reduced to 10 tens which can be extended further by a period not exceeding 30 days. Hence, in view of this, it is advisable that taxpayers keep the copy of the TP report readily available as the timeline stands reduced.
BY- Mr. Salil Kapoor, Mr. Sumit Lalchandani and Ms. Ananya Kapoor, Advocates, specializing in taxation and practicing before Income Tax Appellate Tribunal, High Court and Supreme Court.