On 1 February 2021, the Finance Minister presented the Finance Bill, 2021 in the lower house (Lok Sabha) of Parliament. On 23 March, the lower house of Parliament passed the Bill with amendments.
The key amendments are summarized as follows.
The scope of the equalization levy is further clarified so that "consideration received or receivable from e-commerce supply or services" does not include any consideration for the sale of goods or provision of services which are owned or provided by a resident in India or by a permanent establishment (PE) in India, if the sale of such goods or the provision of such services is effectively connected with the PE.
Definition of "liable to tax" rephrased
The definition of "liable to tax" is rephrased to mean that, in relation to a person and with reference to a country, there is an income tax liability on such person under the law of that country for the time being in force and shall include a person that has subsequently been exempted from such liability under the law of that country.
Clarification of treatment of existing goodwill in a block of assets
Existing blocks of assets will be reduced by an amount equal to the actual cost of goodwill within the block of assets as reduced by:
- the amount of depreciation actually allowed to the taxpayer for such goodwill prior to assessment year (AY) 1988-89; and
- the amount of depreciation that would have been allowed to the taxpayer for such goodwill after AY 1988-89, as if the goodwill was the only asset within such a block.
This amendment will take effect from AY 2021-22 where tax depreciation was claimed on goodwill in AY 2020-21. Further, the reduction shall not exceed the written down value of the block of assets.
Fair market value (FMV) of capital assets transferred under slump sale
The FMV of the transferred undertaking shall be deemed to be the full value of consideration in a slump sale. Further, the value of goodwill that has not been purchased by the taxpayer shall be considered as nil for the purpose of computing net worth of the undertaking.
Tax on transfer of money or property by a firm, association of persons (AOP) or body of individuals (BOI) to its partners or members
The amended bill proposed to simplify the earlier proposed version of section 45(4) of the Income Tax Act (ITA), which provided for the taxability of capital assets received by specified persons upon the dissolution of a firm, AOP or BOI representing their share in their capital account, and provide that any profits from money or capital asset received by a specified person on account of reconstitution of a specified entity shall be deemed to be the capital gains of the specified entity.
Minimum Alternate tax (MAT) relief for secondary adjustment or advance pricing agreement (APA)
As proposed earlier, a corporate taxpayer can make an application before an assessing officer to recompute the book profit of past years on account of a secondary adjustment or an APA. The provisions will apply to the AY beginning on or before 1 April 2020 only if the taxpayer does not utilize the MAT credit in any subsequent AY. No interest shall be payable on a refund arising out of this provision.
Tax on interest earned on provident fund (PF) contribution
In cases where contributions to the PF are made only by the employee, interest accruing on such contributions in excess of INR 500,000 will be taxable.
Presumptive taxation scheme
The proposed presumptive taxation scheme for professionals will not apply to a Hindu Undivided Family.
No tax on income of development financial institutions
Income of institutions established for financing infrastructure and development may be tax exempt for 10 consecutive assessment years and income of developmental financing institutions licensed by the Reserve Bank of India may be tax exempt for the first 5 consecutive assessment years.
Qualified transfer of capital assets for the abovementioned institutions may also be exempt from capital gains tax.
Capital gains tax on unit linked investment plans (ULIPs)
The proposed minimum equity component of 65% or 90%, as the case may be, must be satisfied throughout the term of a ULIP in order to be eligible for the concessional long-term capital gains tax rate of 10%.
Relocation of offshore funds to international financial services centres (IFSCs)
The proposed capital gains tax exemption on the transfer of shares of an Indian company acquired or relocated from an offshore fund will also apply to a specified fund.
Global depository receipts (GDRs) created in an IFSC
The scope of section 115ACA of the ITA, which deals with the taxation of income from GDRs in the hands of specified resident individuals, will include GDRs created in an IFSC.
Income from aircraft leasing
The proposed tax exemption on royalty received by a non-resident from an IFSC unit for the lease of an aircraft will also apply to interest income.
The scope of the proposed 100% deduction allowed to an IFSC unit in respect of income arising from the transfer of a leased aircraft will apply to any person (previously, to domestic companies only).
Further developments will be reported in due course.