Union Budget

Comments / Views on the (some specific Provisions) Finance Bill 2023

Authors: CA. R T Goel and CA. Vijaykumar Chhallani • Members of the Institute • Contact: rtgoelpune@gmail.com / eboard@icai.in • The Chartered Accountant | March 2023 (pp. 40–45 / Journal pp. 984–989)

Scope & Macro-Fiscal Context

This note is on few selected clauses of Finance Bill 2023 in respect of Income Tax Act 1961 (excluding the Income from Business/ Profession). The Finance Bill 2023 / Budget presented by the Hon Finance Minister demonstrated the efforts taken by the Government in balancing the Inflation and Growth is commendable.

Similarly, the Saptarishi theme of the Budget to reflect Inclusive Development, Developing Infrastructure in all segments of economy with an eye on Centenary Year of Independence will go a long way during the Amrit Kaal in making the Strong Economy having Global recognition.

Some Highlights out of Budget of 2023-24 are discussed hereunder:

1) Tax Rates and New Tax Regime

1.1 Re-vamping of New Tax Regime under Section 115BAC

Finance bill make changes in new regime under section 115 BAC was introduced from AY 21-22.

The basic exemption limit of Rs. 2,50,000 has been enhanced to Rs. 3,00,000 and income tax rates have been revised under sub section 1A to Section 115 BAC is inserted with a from AY 2024-25 for new regime:

Total Income Slab (New Regime u/s 115BAC(1A)) Rate of Income Tax
Basic Up to rupees 3,00,000 Nil
Rs. 3,00,001 to Rs. 6,00,000 5%
Rs. 6,00,001 to Rs. 9,00,000 10%
Rs. 9,00,001 to Rs. 12,00,000 15%
Rs. 12,00,001 to Rs. 15,00,000 20%
Above Rs. 15,00,000 30%
  • Applicability: The above-mentioned rates mentioned are applicable to all Individuals, HUF, BOI whether incorporated or not (AOP other than co-operative society). The Education Cess continues at unchanged rate of 4%.
  • Surcharge Rationalisation: The surcharge liability on Total Income exceeding rupees 5 Crores has been reduced to 25% from 37 % effective from AY 24-25. However reduced surcharge liability is applicable only if one is opting for new regime.
  • Old Regime Unchanged: There is no change either in basic exemption limit or tax rates for opting existing / old tax regime.
  • Default Status: The new regime shall become by default from AY 24-25. The option for old regime will be required to be selected every year before due date of filing the IT return.
  • Policy Implication: It appears that the Government desires to switch over fully to new regime in coming years.

1.2 Tax on Income of Certain New Manufacturing Co-operative Societies (Section 115BAE)

This budget has introduced a new section 115 BAE which is in line with section 115 BAB introduced in October 2019, which is applicable to new manufacturing domestic companies.

A newly set up and registered co-operative society on or after 01.04.2023 has commenced manufacturing or production of an article or thing on or before 31.03.2024, shall be taxed @ 15% without any deductions under chapter VIA (other than 80JJA) and certain provisions of section 32 to section 35.

Mandatory Qualifying Conditions:

  1. New manufacturing business should not be formed by splitting any existing business.
  2. New business does not use any plant and machinery, previously used for any purpose.
  3. New business should manufacture a new article or thing and will not include activities like mining, software development, bottling of gas cylinders, conversion of marble block, etc or any other business as may be notified by the Government.

In case of income derived from other manufacturing businesses will be taxed at the rate of 22% and income from other activities will be taxed at the rate of 30%.

2) Exemptions And Deductions

2.1 Expansion of Rebate under Section 87A

The rebate under section 87A was allowed maximum to the extent of Rs. 12,500/- of income tax liability on income up to Rs. 5,00,000/-.

Now the above rebate is increased to Rs. 25,000/- and income of Rs. 7,00,000/- respectively w.e.f., from AY 24-25 and is applicable for new regime as provided in newly inserted sub section (1A) of section 115BAC.

The rebate u/s 87A for old regime is unchanged to the maximum of Rs. 12,500/-.

2.2 Taxation of High-Premium Life Insurance Policies (Section 10(10D))

The clause 10D of Section 10 is proposed to be amended as under:

The amount received will be exempted on the maturity of any insurance policy/ policies issued after 01.04.23 along with bonus allocated on such policy provided the annual premium paid during the term does not exceeds Rs. Five lakhs. This provision shall not apply for Unit linked insurance policies and also the sum received at the time of death.

It appears from the proposals in bill, that in case the insurance premium paid during any of the financial year on one or more policies, is more than Rs. 5 lakhs, then the amount received at the maturity (including bonus) will be taxable income in the year of receipt.

In case the annual insurance premium is up to Rs. 5 lakhs, then the amount received on maturity along with bonus will continue to be exempted, as earlier.

Critical Practical Note: Hence if this proposal becomes Act, it will be a harsh provision for the income tax payer and may result in diminution of interest in Insurance Policies, as a mode of investments.

2.3 Exemption for Payments from Agniveer Corpus Fund (Section 10(12C))

The new clause (12C) of section 10 is proposed to be inserted to exempt the amount paid from the Agniveer Corpus Fund to the person enrolled under Agni path Scheme or to his/ her nominees.

The contribution by the Central Government to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme shall be considered as a salary under Section 17.

This is welcome and justifiable exemption proposed in the Budget.

2.4 Withdrawal of Exemption for Non-Notified News Agencies (Section 10(22B))

The exemption given under clause (22B) of Section 10 shall not be applicable to the income of News Agency other than notified News agency, w.e.f. 01.04.2024 (printed as 01.04.20204). It appears that income of notified news agencies like PTI, etc shall be taxable from AY 24-25.

2.5 Exemption to Development Authorities / Boards (Section 10(46A))

A new clause 46A to section 10 has been inserted to exempt the income of any Body or Authority or Board or Trust established or constituted by / under a Central or State Act having object of planning, development or improvement of Cities, Towns, villages, housing accommodation, etc, which also includes regulating/ developing any activity for the benefit of general public.

2.6 Tighter Realisation & Return Filing Norms for SEZ Units (Section 10AA)

The income of SEZ units as specified u/s 10AA, shall continue to be exempted provided the proceeds from sale of goods or services are realised in convertible foreign exchange, within 6 months from end of previous year or in such extended period as may be approved by Competent authority, i. e. RBI or Authorised Dealer. Further it is provided that for claiming exemption u/s 10AA such unit has to file Return of Income on or before due date u/s 139(1).

2.7 Offshore Derivative Instruments & NDF Contracts in IFSC (Section 10(4E))

It is proposed to substitute clause (4E) of the section 10, w.e.f. AY 24-25 to exempt any income accrued or arisen to, or received by a non-resident as a result of–

  • (i) transfer of non-deliverable forward contracts or offshore derivative instruments or over-the-counter derivatives; or
  • (ii) distribution of income on offshore derivative instruments, entered into with an offshore banking unit of an IFSC referred to in subsection (1A) of section 80LA, which fulfils such conditions as may be prescribed.

2.8 Deductions for Agnipath Scheme (Section 80CCH)

The new section 80CCH is proposed to be inserted for deduction of an amount paid to a person called Agniveer as referred in “Agnipath Scheme” to allow deduction for amount contributed by the Government to the individual account of Agniveer Corpus Fund as well as Contribution from Agniveer Corpus Fund to such account. This will be applicable from AY 23-24.

The deductions for contributions made to the Agniveer Corpus Fund shall be allowed under Section 80CCH in both existing and new tax regimes.

2.9 Rationalisation of Provisions Governing Charitable or Religious Trusts

  • Corpus & Loan Repayments: Application of funds by a charitable or religious trust before 01-04-2021, out of corpus, loans or borrowings shall not be considered an application when such amount is deposited back or invested in the corpus, or the loan or borrowing is repaid. Repayment of loan or investment/depositing back into corpus shall be considered an application for charitable or religious purposes only within 5 years of application from the corpus or loan.
  • Inter-Trust Donations (85% Cap): The donations by a trust or institution to another trust or institution shall be treated as the application of up to 85% of such donations.
  • Removal of Specific Named Funds from Section 80G: Three name-based funds (Jawaharlal Nehru Memorial Fund, Indira Gandhi Memorial Trust, and Rajiv Gandhi Foundation) have been removed from the list of eligible funds for a deduction under Section 80G.
  • Direct Regular Registration: The trusts and institutions that have commenced the activities shall make the application directly for regular registration instead of provisional registration.
  • Cancellation for False Information: The submission of an application for registration containing false or incorrect information, or if it is incomplete, shall be considered a specified violation and result in the cancellation of the registration of trusts or institutions by PCIT/CIT.
  • Accreted Tax u/s 115TD: The provisions of accreted tax under Section 115TD are extended to trusts or institutions if they fail to apply for re-registration.
  • Timelines for Form 9A & Form 10: To claim accumulation of income, the trusts or institutions shall file Form 9A and Form 10 at least 2 months before the due date of filing of return of income i.e. in the current context on or before 31st August.
  • No Exemption via Updated Return: The trusts or institutions cannot claim the benefit of exemption provisions by filing an updated return of income, it means whatever amount is claimed in the original Return of Income that only will be considered for exemption.

3) Capital Gains

3.1 Scope of “Consideration Received” in Joint Development Agreements (Section 45(5A)): The scope of “consideration received” in section 45 (5A) is modified to include “any consideration received in cash or by a cheque or draft or by any other mode” w.e.f. AY24-25. It appears that it is expansion of mode of consideration received for working of Capital Gain. This will be applicable mainly to Joint Development agreement.

3.2 Conversion of Physical Gold into Electronic Gold Receipts (Section 47): A new clause u/s 47 is inserted to clarify that Conversion of physical gold into Electronic Gold Receipts and vice-versa by a SEBI-registered Vault manager shall not be considered a transfer for capital gains.

3.3 Double Deduction Avoidance on Housing Loan Interest (Section 48): The proposed insertion of clause (ii) to the section 48 so as to provide that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the amount of interest under clause (b) of section 24 or under the provisions of Chapter VIA of the Act. It appears that it is a clarificatory provision with object of avoiding double deduction, which is logical amendment.

3.4 Offshore Fund Relocation to IFSC Extended (Section 47(viiad)): The transfer of capital assets due to the relocation of an offshore fund to IFSC, will not be treated as transfer of capital asset, in respect of such relocation up to 31-03-2025.

3.5 Market Linked Debentures Deemed as Short-Term Capital Assets (Section 50AA): In respect of “Market Linked Debentures”, a new section 50AA is inserted to treat the full value of the consideration received or accruing as a result of the transfer or redemption or maturity of the “Market Linked Debentures” as reduced by the cost of acquisition of the debenture and the expenditure incurred wholly or exclusively in connection with transfer or redemption of such debenture, as capital gains arising from the transfer of a short-term capital asset. It is important to note that no deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax.

3.6 Restriction of Exemption u/s 54 up to Rs. 10 Crores: It is proposed to restrict the exemption on investment of Capital gain on acquisition/ purchase/ construction of new residential house to the extent of Rs. 10 crores, irrespective of the actual value of investment in new house. Similarly, there will be restriction on the amount deposited in Capital Gain Deposit Scheme 1988 to the extent of Rs. 10 crores. The proposed restriction will attract Capital Gain Tax liability on Capital Gain which is in excess of Rs. 10 crores, even if total capital gain is invested in new asset.

3.7 Restriction of Exemption u/s 54F up to Rs. 10 Crores & Pro-Rata Computation

Capital gain arising from transfer of any capital asset (other than Residential house) u/s 54F in respect of investment in Residential House: It is proposed to restrict the exemption on investment of Capital gain on acquisition/ purchase/ construction of new residential house to the extent of Rs. 10 crores, irrespective of the actual value of investment in new house. Similarly, there will be restriction on the amount deposited in Capital Gain Deposit Scheme 1988 to the extent of Rs. 10 crores.

The proposed restriction will attract Capital Gain Tax liability on excess of over Rs. 10 crores, even if total capital gain is invested in the new asset. The section 54F is also proposed to amend in similar lines of section 54, by proposing restriction of Rs. 10 crores on investment in new asset (residential house). In short it is proposed to insert a proviso to provide that the amount of net consideration in excess of rupees ten crores will not be taken into account for the purposes of sub-section (4) of 54F, i. e. for computing Capital Gain.

As we are aware that for claiming deduction/exemption of Capital Gain under this section exemption will be available only in the proportion of total investment in new asset divided by consideration received.

This can be illustrated simply as under:
Particulars Amount / Calculation
Net Consideration on sale of plot Rs. 15 crores
Capital gain (after indexation) Rs. 8 crores
Investment in new residential house Rs. 12 crores
New restriction proposed for investment in new asset Rs. 10 crores
Capital Gain exempted (8 / 15 × 10) Rs. 5.33 crores (pro-rata)
Balance capital gain taxable (8 - 5.33) Rs. 2.67 crores

3.8 Consequential Amendments to Sections 54EA, 54EB, 54EC, 54ED: The sections 54EA, 54EB, 54EC, 54ED have been amended by omission of sub section (3) clause (a) in all the sections mentioned above. It appears that in all the sections mentioned above clause 3 or 3(a)(b) says that if any cost to acquire is capitalised then again such shall not be allowed as deduction u/s 88. By virtue of omission of section 88, this is consequential amendment.

4) Income from Other Sources

4.1 Angel Tax Extended to Non-Resident Investors (Section 56(2)(viib)): The Private Ltd company and closely held Public Company (Companies in which Public is not substantially interested) which receives value of shares more than face value, the aggregate consideration in excess of fair market value of such shares from any person (the word “being a resident” is omitted) shall be taxable u/s 56(2) w.e.f. 01.04.2023. Accordingly, it will cover all investors including non-resident.

4.2 Taxation of Distributions / Repayments by Business Trusts (Section 56(2)(xii)): If the unit holder having units in business trust receives any sum (other than interest, dividend from special purpose vehicle) from the Business Trust, the same shall be taxable w.e.f. AY 24-25. So also, any redemption amount is received by unit holder from Business Trust, the same shall be taxable after reducing the cost of acquisition, subject to condition that cost does not exceed the sum received.

4.3 Taxation of Sums Received under High-Premium Life Insurance Policies (Section 56(2)(xiii)): The clause (xiii) sub section (2) of section 56 is proposed to be inserted as under: Amount received (in excess of aggregate amount of insurance premium paid) will be taxable on the maturity of any insurance policy/ policies issued after 01.04.23 along with bonus allocated on such policy/ policies of which the annual premium is paid during the term of such policy/ policies exceeds Rs. Five lakhs. This provision shall not apply for Unit linked insurance policies and also the sum received at the time of death.

5) Set Off and Carry Forward of Losses

5.1 Strategic Disinvestment Definition Amended (Section 72A): The definition of “strategic disinvestment” in Section 72A is amended w.e.f. AY 23-24 to provide that the sale of shareholding by the Central or State Governments, or a public sector company in another public sector company or a company which results in the reduction of its shareholding below 51%, and transfer of control to the buyer. It is further explained that requirement of transfer of control referred to in sub-clause (b) may be carried out by the Central Government or the State Government or the public sector company or any two of them or all of them.

5.2 Loss Carry Forward in Banking Mergers Post Strategic Disinvestment (Section 72AA): Section 72AA is amended to allow the carry forward of accumulated losses and unabsorbed depreciation in the event of the merger of a banking company with another banking company within 5 years of the strategic disinvestment, w.e.f. AY 24-25.

5.3 Relaxation for Eligible Start-ups from 7 to 10 Years (Section 79): As per proposed amendment to Section 79, the Eligible start-ups can set off and carry forward the losses incurred during the 7 years of incorporation even in case of a change in shareholding, provided 100% of shareholders continue during the relevant period. The time limit of 7 years is increased to 10 years. It reveals that in case of eligible start up as referred to in section 80IAC, additional 3 years period is given for carry forward of losses.

6) Miscellaneous Provisions

  1. Deemed Accrual for Payments to RNOR (Section 9(1)(viii)): The clause (viii) of Section 9(1) is proposed to substitute so as to also include person not ordinarily resident in India. In short, any resident pays an amount outside India, to NRI or not ordinary Resident the same shall be treated as income accruing or arising in India.
  2. Perquisite Valuation of Rent-Free/Concessional Accommodation (Section 17(2)): The Rent-free or concessional accommodation provided by an employer to an employee will be taxable in case valuation of accommodation provided as per prescribed method of valuation of such accommodation is in excess of amount recovered / recoverable from the employee. It appears that the Rent Free or Concessional Accommodation, hereinafter will be charged at fair value.
  3. Creation of Joint Commissioner (Appeals) Authority (Sections 2(19B) & 117): The new income tax authority under section 2(19B) and Section 117 of IT Act, named as Joint Commissioner of Income Tax (Appeals) is added and the authority of Additional Commissioner of Income Tax (Appeals) has been omitted.
  4. Specified Domestic Transactions with Co-operatives (Section 92BA): Bill seeks to amend section 92BA of the Income-tax Act relating to meaning of “specified domestic transaction”. It is proposed to insert a new clause (vb) to the said section to include the transaction between the cooperative society and the other person with close connection within the meaning of “specified domestic transaction”. This is consequential to the insertion of new section 115 BAE, which relates to newly incorporated Co-operative Societies conducting manufacturing activities.
  5. Transfer Pricing Documentation Timeline Reduced (Section 92D(3)): In section 92D of the Income-tax Act, in sub-section (3), for the words “period of thirty days”, the words “period of ten days” shall be substituted. It is proposed to amend the said sub-section (3) and the proviso to reduce the said period from thirty days to ten days for furnishing any information or document, extendable by a further period of not exceeding thirty days.
  6. TDS on Lottery/Gambling Winnings Threshold Aggregation (Sections 115BB, 194B, 194BB): Section 115BB of the Act provides for the rate of tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature. It is seen that deductors are deducting tax under section 194B and 194BB of the Act by applying the threshold of Rs 10,000/- per transaction and avoiding tax deduction by splitting a winning into multiple transactions each below Rs 10,000/-. It is amended to include the aggregate amount of winning in a financial year and not to each instance. Similarly for Section 115BB shall not apply for any winnings from any online games.
  7. Special Tax Regime for Online Game Winnings @ 30% (Section 115BBJ): The new section 115BBJ is proposed to be inserted relating to tax on winnings from online games, to provide that, where the total income of an assessee includes any income by way of winnings from any online game, the income-tax payable shall be the aggregate of—
    • (i) the amount of income-tax calculated on net winnings from such online games during the previous year, computed in the manner as may be provided by rules, shall be taxed @30%.
    • (ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the net winnings referred to in clause (i).
    This amendment will be applicable from AY 24-25.
  8. Cash Loan & Deposit Threshold Hike for PACS & PCARD (Sections 269SS & 269T): As per amended section 269SS and 269T, Primary Agricultural Credit Societies (PACS) and Primary Co-Operative Agricultural and Rural Development Banks (PCARD) are allowed to accept deposits or grant loans to their members in cash up to Rs. 2 lakhs. This increased limit of Rs. 2 lakhs also apply to the repayment of such loans or deposits.