Finance (No. 2) Bill 2014

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Charity Jody Stafford
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1 Finance (No. 2) Bill 2014 Proposed Income Tax Amendments Mr. R.N. LAKHOTIA Leading Income Tax Consultant & Author The Finance Minister presented the Finance (No.2) Bill 2014 along with the Union Budget for The rates of income tax for the A.Y are the same as those laid down the part III of the First schedule to the Finance Act, 2013 for the purposes of computation of Advance tax, etc. The rates of income tax for computation of Advance Tax etc. during the F.Y for individuals, HUFs, AoPs. Body of individuals and artificial judicial person are as under :- Upto Rs. 2,50,000 Nil From Rs. 2,50,001 to Rs. 5,00,000 10% From Rs. 5,00,001 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% In the case of every resident Individual, who is of the age of 60 years or more but less than 80 years at any time during the previous rate of income tax Act,, the I.T. rates are :- Upto Rs. 3,00,000 Nil From Rs. 3,00,001 to Rs. 5,00,000 10% From Rs. 5,00,001 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% In the case of every resident individual who is of the age of 80 years or more at any time during the previous year, the rates of Income Tax are :- Upto Rs. 5,00,000 Nil Rs. 5,00,001 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% 1

2 The income Tax calculated at the above rates shall be increased by a surcharge at the rate of 10% of such I.T. for a person having a total income exceeding Rs. 1,00,00,000, with a marginal relief for the F.Y , education cess on I.T. and secondary & Higher education Cess on I.T. would 2% and 1% in all cases. The important proposed income tax amendments are described below :- 1. Dividend and Income Distribution Tax Section For the purpose of determining the tax on distributed profits payable u/s 115-0, any amount by way of dividend would be increased to such amount as would after reduction of the additional income tax on such increased amount under the specified section 115R (2), be equal to the amount of income distributed by the Mutual Fund. This would take effect from Long-Term Capital Gains on debt Oriented Mutual Fund and its qualification as Short Term Capital Asset Sec. 2 (42 A). An unlisted security and a unit of a mutual Fund (other than an equity oriented mutual fund) would be a short-term capital asset if it is held for not more than 36 months. This amendment would apply in relation to the A.Y and subsequent assessment years. 3. Tax on Long-term Capital Gains on Units Sec. 112 The concessional rate of tax of 10% would be allowed on long-term capital gain on listed securities (other than unit) and zero coupon bonds. This would take effect from the A.Y and subsequent assessment years. 4. Taxation Regime for Real Estate Investment Trust (REIT) and Infrastructural Investment Trust (Invit) A specific taxation regime would be created for providing the way the income in the hands of such trusts is to be taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts. Its main features would be the following :- (i) The listed units of a business trust, when traded on a recognised stock exchange would attract same levy of securities transaction tax (STT), and would be given the same tax benefits in respect of taxability of capital gains as equity shares of a company i.e., long-term capital gains would be exempt and short-term capital gains would be taxable at the rate of 15%. 2

3 (ii) (iii) (iv) (v) (vi) (vii) (viii) In the case of capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, the preferential capital gains regime (due to levy of STT) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal. Further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor. The holding period of these shares shall also be included to the holding period of such units. The income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV. However, withholding tax at the rate of 5% in case of payment of interest component of distributed income to a resident unit holder would be effected by the trust. In case of external commercial borrowings by the business trust, the benefit of reduced rate of 5 per cent tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in section 194LC of the Act. The dividend received by the trust shall be subject to dividend distribution tax at the level SPV but will be exempt in the hands of the trust, and the dividend component of the income distributed by the trust to unit holders will also be exempt. The income by way of capital gains on disposal of assets by the trust shall be taxable in the hands of the trust at the applicable rate. However, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder. Any other income of the trust shall be taxable at the maximum marginal rate. The business trust is required to furnish its return of income. The necessary forms to be filed and other reporting requirements to be met by the trust shall be prescribed to implement the above scheme. This amendment will take effect from 1 st October, Investment Allowance to a manufacturing Company Section 32AC The deduction of 15% of cost of new asset would be available for investment made in plant and machinery upto This deduction would be allowed if the company on or after invests more than Rs. 25 crore in plant and machinery during the previous year. An assessee who is eligible to claim deduction under the existing combined threshold limit of Rs. 100 crore for investment made in previous years and would continue to be 3

4 eligible to claim deduction under the existing provisions of section 32AC (1) even if its investment in the previous year is below Rs. 25 crore. This amendment would apply from the A.Y Extension of the sunset date for the power sector Sec. 80 IA With a view to provide further time to the undertaking to commence the eligible activity to avail the tax incentive, this terminal date would be extended for a further period upto This would apply for the A.Y and subsequent assessment years. 7. Deduction in respect of capital expenditure on specified business Section 10AA & 35AD. The following two new businesses would be included as specified business for the purpose of investment linked deduction so as to promote investment in these sectors, which are :- (a) (b) Laying and operating a slurry pipeline for the transportation of iron ore; Setting up and operating a semi-conductor, water fabrication manufacturing unit, if it is notified by the CBDT. The date of commencement of these operations would be or after Limit of deduction raised sec. 80C The limit of deduction for Life Insurance Premium, PPF, PF etc., would be raised from Rs. 1 lakh to Rs. 1.5 lakh from the A.Y The maximum limit for investment for PPF has been increased to Rs. 1,50, Deduction from income from house property Sec. 24 (b) The amount of interest on borrowed capital would be allowed deduction upto Rs. 2 lakhs from the A.Y This deduction would be permissible to existing house owners as well as to persons who purchase property in the F.Y and subsequent financial years. 10. Concessional rate of tax on Overseas borrowing - Section 194LC & 206 AA The benefit of the concessional rate of withholding tax is extended to borrowings by way of issue of any long-term bond and is not limited to a long term infrastructure bond. It would be effective from

5 11. Reduction in tax rate on certain dividends received from foreign companies Section 115 BBD. The concessional rate of 15% tax on certain dividends from foreign companies will be for the A.Y and subsequent years. 12. Roll back provision in Advance Pricing Agreement (APA) Scheme Sec 92 CC (9A) The period of roll back mechanism in the APA scheme is not to exceed four previous years. It would be effective from Characterisation of income in case of Foreign Institutional Investors Section 2 (14). Any security held by foreign institutional investor which has invested in such security as per SEBI regulations would be treated as capital asset. This amendment would apply from the A.Y Alternate Minimum Tax Sec. 115 JC The total income would be increased by the deduction claimed u/s 35 AD for purpose of computation of adjusted total income. This would apply in relation to the A.Y and subsequent assessment years. 15. Taxability of advance for transfer of capital asset Sec 2 (24), 51(3) & 56(2) (ix) Any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset would be chargeable to tax if such sum is forfeited and the negotiation does not result in the transfer of such capital asset. This would apply from the A.Y Tax deduction at source from non-exempt payments made under life Insurance Policy Sec. 194 DA Deduction of tax at the rate of 2% on sum paid under a life insurance policy, including the sums allocated by way of bonus which are not exempt u/s 10 (10 D) of the I.T. Act would be made. However, no deduction would be made if the aggregate sum paid in a financial year to an assessee is less than Rs. 1,00,000. This would be effective from

6 17. Rationalisation of taxation regime in the case of charitable trusts and institutions Under sections 11 and 10 (23C), income for the purposes of application would be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset acquisition of which has been claimed as an application of income under these sections in the same or any other previous year. This would be effective from the A.Y Clarification in respect of section 10 (23C) If the government grant to a university or other educational institution, hospital or other institution during the relevant years exceeds a prescribed percentage of the total receipts (including any voluntary contributions) of such university, etc. then it shall be considered as being substantially financed by the Government for that previous year. This would apply from the A.Y Cancellation of registration of the trust or Institution in certain cases Section 12 AA Where a trust or institution has been granted registration and subsequently it is noticed that the activities are being carried and in such a manner that (i) (ii) (iii) (iv) Its income does not ensure for the benefit of general public, It is for benefit of any particular religious community or caste, in case it is established after commencement of the I.T. Act. Any income or property of the trust is applied for the benefit of specified persons like author of trust, etc. or Its funds are invested in prohibited modes. Then the principal commissioner or the commissioner may cancel the registration if the trust or institution does not prove that there was a reasonable cause for the activities to be carried out in the above manner. This would be effective from Anonymous donations Section 115 BBC The income tax payable would be the aggregate of the amount of income tax calculated at the rate of 30% on the aggregate of anonymous donations received by the assessee or Rs. 1,00,000 which ever is higher, and the amount of income tax with which the assessee would be chargeable This total income been reduced by the aggregate of the anonymous donations which is in excess of the 6

7 5% of the total donations received by the assessee or Rs. 1,00,000 as the case may be. This would be effective from the A.Y Corporate Social Responsibility expenditure Section 37 (1) Any expenditure incurred by an assesse on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 would not be deemed to have been incurred for the pupose of business. 22. Disallowance of expenditure for non-deduction of tax at source Section 40 (a) (i) (ia) In case of non-deduction on non payment of TDS on payments made to the residents as is specified in section 40 (a) (ia) of I.T.Act., the disallowance would be restricted to 30% of the expenditure claimed. This would apply for the A.Y and subsequent years. 23. Tax deduction at source To enable a deductor to file a correction statement, amendments effective from have been proposed. 24. Business of plying, Hiring or Leasing Goods carriages Section 44AE A uniform amount of presumptive income of Rs. 7,500 for every month (or part of a month) for all types of goods carriage would apply for the A.Y and subsequent years. 25. Income Computation and disclosure standards Section 145 The notified Accounting Standards are not meant for maintenance of books of account but are to be followed for computation of income. It would apply from the A.Y and onwards. 26. Miscellaneous Amendments (i) Alternate Minimum tax - Total income to be increased by the deduction clamed under section 35AD. (ii) To enable the verification of returns either by a sign in manuscript or by any electronic modes section 140 is amended from

8 (iii) Clarification in respect of section 10 (23C) of the I.T. Act to provide for some institutions as substantially financed by the government operative from the A.Y (iv) Rationalisation of the definition of International Transaction (v) Levy of penalty u/s 271G by transfer pricing officers. (vi) Applicability to earlier years of the registration granted to a trust or institution effective from (vii) Disallowance of expenditure for non deduction of tax at source. (viii) Statement the deduction of tax at source. (ix) Extension of income-tax exemption to special undertaking of UTI. (x) Transfer of Government security by one non-resident & another nonresident (xi) Speculative transaction in respect of commodity derivatives. (xii) Capital Gains on transfer of an asset by way of compulsory acquisition. (xiii) Capital Gains exemption in case of investment in a residential house property. (xiv) Capital gains exemption on investment in specified Bonds. (xv) Losses in speculation business. (xvi) Income tax Authorities (xvii) Power of Survey (xviii) Mutual Funds, Securitisation Trusts and Venture Capital Companies or venture capital fund to file return of income. (xix) Enquiry by prescribed income-tax authority (xx) Estimate of value of assets by Valuation Officer (xxi) Interest payable by assessee under section 220 (xxii) Mode of acceptance or repayment of loans and deposits under section 269SS (xxiii) Punishment in failure to produce accounts and statements (xxiv) Provisional attachment under section 281 B (xxv) Obligation to furnish statement of information (xxvi) Assessment of income of a person other than the person who has been searched (xxvii) Extension of tax benefits under section 80CCD to private sector employees. (xxviii) Credit of Alternate Minimum Tax. 8

Union Budget 2014 Analysis of Major Direct tax proposals

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