Overview of 25 amendments to Income Tax Act, 1961 Vide Finance Act, 2020

To give effect to the financial proposals for the FY 2020-2021, the Government of India has amended inter alia the Income-tax Act, 1961 (Act) vide the Finance Act, 2020 published in the Gazette of India on 27 March 2020.

In this edition, we hereby bring to you certain specific amendments to the Act, together with their impact analysis from practical point of view. Unless otherwise specified, the provisions discussed hereunder shall come into force on the 1 April 2020.

Relevant Amendments

1. Widening the scope of ‘Residential Status’ of NRIs and PIOs visiting India (Effective from 1 April 2021):

Amendment has been brought in Explanation 1(b) to S 6 (1), whereby an Indian citizen residing outside India i.e. PIO or NRI, visits India, having total income, other than the income from foreign sources, exceeding INR 15 Lakhs during the PY, and has been in India for a period of (i) minimum 120 days in the PY; and (ii) minimum 365 days in the last 4 years immediately preceding that PY, then such individual shall also be treated as ‘Resident’ of India.

Previously, all categories of NRI and PIO, irrespective of the source or quantum of income, were considered to be a ‘Resident’ only after he stayed in India for a (i) minimum period of 182 days in the PY; and (ii) minimum 365 days in the last 4 years immediately preceding that PY.

Further S 6 (1A) has been inserted whereby an Indian citizen, having total income, other than the income from foreign sources, exceeding INR 15 Lakhs during the PY shall be deemed to be resident in India in that PY, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

Further also, apart from the dual conditions of ‘Resident but Not Ordinarily Resident’ that has been retained as per the existing law, an NRI or PIO, having total income, other than the income from foreign sources, exceeding INR 15 Lakhs during the PY, has been in India for a minimum period of 120 days bus less than 182 days, will be treated as ‘Resident but Not Ordinarily Resident’. The NRI or PIO, deemed to be resident in India by virtue of S 6 (1A) above, shall also be deemed to be ‘Resident but Not Ordinarily Resident’ in India.

2. Dividend, Interest or LTCG earned by specified person to be exempted:

S 10 (23FE) has been inserted whereby any income in the nature of dividend, interest or LTCG arising from an investment made by (i) WOS of Abu Dhabi Investment Authority being a resident of the UAE; (ii) any foreign sovereign wealth fund; (iii) any foreign pension fund, have been exempted wherein the investment is made on or after 1 April 2020 but on or before the 31 March 2024 and held for atleast 3 years. Such investments shall be made in the form of debt or share capital or unit, in the following entities:

• a business trust (registered as InvITs or REITs); or
• an infrastructure entity; or
• Category I or Category II of AIF (having 100% investment in infrastructure entity).

3. Abolition of Dividend Distribution Tax and dividend being taxed in the hands of the recipient (Effective from 1 April 2021):

S 10 (34) and S 10 (35) have been amended to tax dividend income in the hands of the recipient, received on or after 1 April 2020, from any domestic companies and Mutual Funds, respectively. However, such income shall continue to be exempted if the tax has already been paid under S 115O or S 115BBDA, as detailed hereunder.

Finance Act, 2020 has restricted the applicability of S 115O till 31 March 2020. Therefore, domestic companies are not liable to pay tax on distributed profits from 1 April 2020 and thereafter.

Also, S 115R (2) has been amended to tax distributed income to unit holders by Specified Companies or Mutual Funds till 31 March 2020. It means, the Specified Company/Mutual Fund is not required to pay tax on the income distributed by them after the said timeline and thereafter the same will be taxed in the hands of recipient i.e., unit holders. Here, Specified Company shall mean a company whose entire capital is subscribed by such financial institutions or banks as may be specified by the Central Government under the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, for the purpose of transfer and vesting of the undertaking.

Further, S 115BBDA (1) has been amended to restrict its application till 31 March 2020. Therefore, any income received in excess of INR 10 Lakhs by inter alia an individual/HUF/partnership firm/private trust, by way of dividend from a domestic company (ies) shall not be taxed in the hands of the recipient on and from 1 April 2020 and thereafter. This is to eliminate double taxation in the hands of the recipient.

S 80M has been reintroduced whereby deduction is made available to the domestic companies receiving dividend from another domestic company or foreign company or business trust. Such deduction shall be the lesser of the following:

• Amount of dividend received from domestic companies or foreign companies or business trust;
• Amount of dividend distributed upto one month prior to the due date of filing return.

Further, S 57 of the Act was amended to restrict deduction for interest expense only subject to 20% of dividend income or income in respect of units of a Mutual Fund, and no other deduction shall be allowed against such dividend income or income in respect of units of Mutual Fund.

Finally, certain consequential changes has been made by removing the reference of S 115O in inter alia S 115A, S 115AC, S 115ACA, S 115AD, S 115C and S 194, thereby taxing the dividend incomes in the hands of the recipients.

4. Income of Indian Strategic Petroleum Reserves Limited from replenishment it its storage facility is exempted:

S 10 (48C) has been introduced whereby income of Indian Strategic Petroleum Reserves Limited, being the WOS of the Oil Industry Development Board under the Ministry of Petroleum and Natural Gas, accruing as a result of arrangement for replenishment of crude oil stored in its storage facility in pursuance of directions of the Central Government, shall be exempted. However if the crude oil is not replenished in the storage facility within 3 years from the end of the PY in which the crude oil was removed from the storage facility for the first time, such exemption shall not be available.

5. Procedure for fresh registration of Trusts (Effective date 1 June 2020):

S 12AB has been introduced whereby all existing charitable and religious institutions which were registered under S 12A or 12AA are compulsorily required to switch to S 12AB for fresh registration within 3 months from 1 June 2020 (i.e. by 31 August 2020). Therefore, S 12AA dealing with the procedure for registration of a charitable trust or institution will cease to be applicable from 1 June 2020.

Provisions of registration under S 12AA or S 12A will become redundant from 1 June 2020. All the existing registered trusts under the erstwhile S 12A or S 12AA would move to new provision S 12AB.

Currently, several hospitals, schools and colleges are registered simultaneously under S 10 (23C) or S 10 (46) notification and S 12AA. Consequently, in the event the registration under either under S 10 (23C) or notification under S 10 (46) stands inoperative, then Charitable trusts or institutions may apply for registration under S 12AB. In hindsight, if the Charitable trust or institution is registered under S 10 (23C) or notification under S 10 (46), then its registration under S 12A or S 12AA stands automatically revoked.

6. Employer’s cumulative contribution over INR 7,50,000 to be taxed as Perquisite:

Previously in case of (i) employer’s contribution to recognised PF amount in excess of 12% of salary was taxable under the head ‘income from salary’; (ii) employer’s contribution to Superannuation Fund of amount in excess of INR 1,50,000 was taxable in the nature of ‘perquisite’; and (iii) employer’s contribution to NPS, entire contribution was taxable under the head ‘income from salary’, subject to deduction available under S 80CCD.

By way the newly substituted S 17 (2) (vii), with effect from 1 April 2021, cumulative contribution by employer to recognized PF, approved superannuation fund and NPS (or any other scheme notified under S  80CCD) in excess of INR 7,50,000, is now taxable in the nature of ‘perquisite’.

Further, any interest or dividend or any other amount accruing from such contribution of the employer, shall be included in total income by way of ‘perquisites’.

7. Differential amount between value adopted by SVA and actual consideration received increased to 10% (Effective date 1 April 2021):

By way of amendments to S 43CA, S 50C and S 56, variation between:

• the value of consideration received or accruing as a result of transfer of an asset being land or building or both; and
• the value adopted by any authority of the State Government for the purpose of payment of stamp duty in respect of such transfer,

is now increased to 10% of the actual sale consideration, from the earlier 5%.

It means, if the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed 110% of the actual sale consideration received or accruing as a result of the transfer, the consideration so received or accrued as a result of the transfer shall be deemed to be the full value of the consideration.

8. Tax Audit turnover limit increased from INR 1 Crore to INR 5 Crore for persons carrying on business provided transactions in cash not more than 5% of total transactions:

In order to reduce compliance burden on small and medium tax payers, proviso to S 44AB (a) has been inserted by increasing the turnover limit from INR 1 Crore to INR 5 Crores for compulsory Tax Audit, provided:

• aggregate of all amounts received including amount received for sales, turnover or gross receipts in cashduring the PY does not exceed 5% of total receipts; and
• aggregate of all payments made including amount incurred for expenditure in cash during the PY does not exceed 5% of such payment.

As an effect of the change in the threshold from INR 1 Crore to INR 5 Crores as per the amendment in S 44AB (a), consequential amendments have taken place in inter alia S 194A (1), Explanation (i) (l) (B) to S 194C, Second Proviso to S 194H, Second Proviso to S 194I and Second Proviso to S 194J (1), in order to retain the earlier limit of INR 1 Crore for business and INR 50 Lakhs for profession, as applicable, for deduction of tax.

Further the due date for furnishing of audit reports under S 44AB has been changed by mentioning it as the ‘date one month prior to’ the due date for furnishing the return of income under S 139 (1). It means, since the due date for furnishing return of income under S 139 (1) is amended to 31 October of relevant AY, the due date for submission of tax audit report under this section will be 30 September of the said year. In the light of the above, consequential amendments have also taken place in the provisions relating to due date for furnishing the tax audit reports.

It can be gathered that ‘pre-filled income tax return form’ is high on the Government agenda and the data received from the audit report may be used by the Income Tax CPC in generating the pre-filled income tax return form.

9. Extension of time period for availing deduction in respect of interest payment on loan taken for certain residential house property (Effective date 1 April 2021):

The benefit of deduction given under S 80EEA relating to the interest paid on the specified housing loans, was allowed only to the loan availed on or before 31 March 2020. By way of amendment to S 80EEA (3), this benefit is extended to the all loans sanctioned on or before 31 March 2021.

10. Amendments relating to eligible start-ups (Effective date 1 April 2021):

S 80 IAC has been amended to allow deduction of 100% of profits, at the option of the assessee, for any 3 consecutive AYs out of the 10 years (which was previously out of 7 years), beginning from the year in which the eligible start-up is incorporated.

Further, eligible start-ups shall include all start-ups with a total turnover of maximum INR 100 Crores in the PY, from the earlier threshold of INR 25 Crores.

Further also, amendments have been made to timelines for:

• Payment of tax or interest on the income which an assessee, being an employee of the aforementioned start-up, has received as perquisites in the form of employees’ stock option or sweat equity, free of cost or at concessional rate, allotted or transferred directly or indirectly by the current employer, through insertion of S 156 (2);
• Payment of income tax directly by the aforesaid assesse w.r.t. the aforesaid income, in case no provision for deduction is made under the Act and no such income tax has been deducted, by way of insertion of S 192 (1);
• TDS (u/s 192 (1)) or payment of tax by employer (u/s 192 (1A)) by the aforesaid start-up for payment of aforementioned category of perquisites to its employees, by insertion of S 192(1C).

Such deduction or payment of tax or interest, as applicable, shall be done within 14 days from the earliest of:

• expiry of 48 months from the end of the relevant AY;
• date of sale of such employees’ stock option or sweat equity share by the assesse being the employee; and
• date of the assessee ceasing to be the employee of the employer who allotted or transferred to him such employees’ stock option or sweat equity share.

11. Extension of time period for availing deduction in respect of profits of business of developing and building housing projects (Effective date 1 April 2021):

Amendment has been brought to S 80 IBA (2) (a), whereby the date of approval of the building plan relating to the housing project issued by the respective competent authority, has been extended to 31 March 2021 for availing 100% deduction of profits from such business.

12. Amendment in Due Date for furnishing Tax Audit Report relating to entities having international transaction:

S 92F (iv) has been amended, whereby the due date for furnishing Tax Audit Report relating to international transactions or specified domestic transactions under S 92E, has now been changed to the date falling 1 month prior to the due date for furnishing the return of income under S 139 (1) (i.e. 30 November) for the relevant AY. Meaning, such entities shall now furnish the said Report by 31 October of the relevant AY.

13. Option of Domestic Companies to pay tax at a concessional rate of 22%:

S 115BAA of the Act was inserted w.e.f. 1 April 2020, to give the benefit of a reduced corporate tax rate for the domestic companies only. According to the provision states that domestic companies have the option to pay tax at the rate of 22% from the FY 2019-20 (AY 2020-21) onwards, if such domestic companies adhere to certain conditions. Such conditions include not availing (i) certain deductions, (ii) benefits of setting off, (iii) the benefit of certain depreciation etc. Vide the Finance Act, 2020, the condition relating to deductions have been amended to allow deductions under S 80M which talks about deduction in respect of certain inter-corporate dividends.

In case an assessee opts to pay tax at 22%, a Surcharge of 10% and Cess of 4% shall also apply. Thus, the effective tax rate would be 25.17%. Further, under S 115JB (5A) (ii), the provisions of MAT is also not applicable on such entity opting to pay tax under S 115BAA.

14. Option of new manufacturing Domestic Companies to pay tax at a concessional rate of 15%:

S 115BAB of the Act was inserted w.e.f. 1 April 2020, to give the benefit of a reduced corporate tax rate for certain new manufacturing domestic companies only. According to the provision states that such domestic companies have the option to pay tax at the rate of 15% from the FY 2019-20 (AY 2020-21) onwards, if such domestic companies adhere to certain conditions. Such conditions include inter alia not availing (i) certain deductions, (ii) benefits of setting off, (iii) the benefit of certain depreciation etc. Vide the Finance Act, 2020, the condition relating to deductions have been amended to allow deductions under S 80M which talks about deduction in respect of certain inter-corporate dividends.

In case an assessee opts to pay tax at 15%, a Surcharge of 10% and Cess of 4% shall also apply. Thus, the effective tax rate would be 17.16%. Further, under S 115JB (5A) (ii), the provisions of MAT is also not applicable on such entity opting to pay tax under S 115BAB.

15. Option of New Tax Slabs for Individuals & HUF:

As per the newly inserted S 115BAC, option has been given to all individuals/HUF to pay tax as per New Slab Rates (as detailed below) on total income computed without claiming any deductions/exemptions w.e.f. FY 2020-21 (AY 2021-22).

Other points of consideration are:

• Basic exemption limit for senior citizen and super citizen individuals remains unchanged at INR 3 Lakhs and INR 5 Lakhs, respectively
• Rebate of income tax (i.e. up to INR 12,500 if total income does not exceed INR 5 Lakhs) remains unchanged and equally applicable for resident individual even if he/she chooses to opt for New Slab Rates
• No change in surcharge rates
• Option shall be exercised for every year along with filing of income tax return
• Provisions of AMT under S 115JC and S 115JD, shall not apply to Individual/HUF having business income who chooses to pay tax as per New Slab Rates.

16. All Partners required to furnish Return of Income:

In S 139 (1) Explanation 2 (iii), the word ‘working Partner’ has been replaced with ‘Partner’. Effectively, now all the partners (including working and sleeping partners) of a firm whose accounts are required to be audited shall be liable to furnish return of income within 31 October of the AY.

17. Return of Income may be verified by any person as may be prescribed:

As per the insertions in S 140 (c) and S 140 (cd), in case of a Company or an LLP, over and above their Directors and Partners respectively, any other person as may be prescribed can now verify returns filed by the Company or LLP.

18. Deduction of Tax before payment of Dividend:

S 194 has been amended to include provision for deduction of tax at 10%, before payment of dividend in any mode by any Indian Company or company which has made prescribed arrangements for declaration and payment of dividends in India. Prior to the said amendment, only dividends paid in cash, cheque or warrant were liable for such deduction at the rates in force.

Further, as vide amendment to the first proviso to S 194, no such deduction is to be made in case of an individual shareholder where (i) payment is made in any mode other than cash; and (ii) amount of aggregate of dividend distributed during the financial year does not exceed INR 5,000. Prior to the amendment, the same was applicable only in case of payment by an account payee cheque and the aggregate of dividend not exceeding INR 2,500.

19. Inclusion of associates of customers within the scope of ‘Work’ w.r.t. TDS on Contractors:

By way of the amendment to the Explanation (iv) (e) to S 194C, the scope of ‘work’ as per the said provision in relation to manufacturing and supply contracts now include, ‘associates of customers’ together with the earlier position of only with the ‘customers’.

20. Obligation to deduct tax in relation to certain units:

S 194K has been inserted whereby all persons shall deduct tax at 10%, prior to payment of income, only where such income exceeds INR 5,000 and it is not in the nature of capital gain, in respect of any of the following income:

• units of a Mutual Fund registered with the SEBI or a Mutual Fund set up by a public sector bank/ a public financial institution/ authorised by the RBI and subject to conditions specified by the Central Government; or
• units from the Administrator, as may have been appointed by the Central Government, of the specified undertaking including all business, assets, liabilities and properties of the trust representing and relatable to the schemes and Development Reserve Fund specified in the Schedule I of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002; or
• units from a company whose entire capital is subscribed by such financial institutions or banks as may be specified by the Central Government under the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, for the purpose of transfer and vesting of the undertaking.

21. Obligation to deduct tax before payment exceeding 1 Crore in cash (Effective Date 1 July 2020):

S 194N has been substituted whereby (i) all banks, (ii) co-operative society involved in banking; and (iii) post office, shall deduct tax at 2%, in case such bank/ co-operative society/ post office pays any sum exceeding INR 1 Crore in cash during the PY to any person from one or more of its account(s) held with the bank/ co-operative society/ post office.

Further, as per the proviso, in case such person receiving such payments has failed to file returns of income w.r.t the 3 immediately preceding PYs, TDS shall be deducted as per the following rates:

• For payment of any sum exceeding 20 Lakhs but not exceeding 1 Crore, in cash: deduction of tax at 2%;
• For payment of any sum exceeding 1 Crore in cash: deduction of tax at 5%.

This provision does not apply to payments made to (i) Government, (ii) banking company, co-operative society involved in banking or post office, (iii) business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued by RBI, (iv) white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation by RBI.

Further, the Central Government also reserves the right to notify certain specific recipients in whose case the abovementioned provision may not apply or may apply at a reduced rate.

22. Obligation to deduct tax by e-commerce operator:

S 194O has been inserted whereby e-commerce operators shall deduct tax at 1% before crediting the amount of sale of goods or provision of service to the e-commerce participants, relating to such sale which has been facilitated by the platform of the e-commerce operator.

It is pertinent to note that in case any amount has been directly credited to the e-commerce participant from the purchaser of such goods or services, such amount shall be deemed to be the amount credited or paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount for the purpose of deduction of income-tax.

The above obligation to deduct tax shall not apply in case (i) the e-commerce participant is either an individual or an HUF; (ii) total amount of such sale or services does not exceed INR 5 Lakhs during the PY; and (iii) the e-commerce participant has furnished its PAN or Aadhaar Number to the e-commerce operator.

The CBDT reserves the right to issue guidelines with the approval of the Central Government, for removing difficulties relating to this provision.

Further, a proviso to S 206AA (1) has been inserted whereby in case the e-commerce participant fails to furnish its PAN to the e-commerce operator, the e-commerce operator shall deduct tax at the rate higher of:

• 5%; or
• rate or rates in force.

23. Introduction of Annual Information Statement:

Prior to the amendment, S 203AA used to provide for the preparation and submission of Statement of Tax Deducted in Form 26AS, by the income-tax authority. Vide this amendment the said S 203AA has been omitted and on similar lines a new provision S 285BB has been inserted, whereby the income-tax authority is now obligated to upload an Annual Information Statement in the electronic filing account of the assesse as available at the e-filing portal. The form, manner, timeline of such uploading and information forming part of such statement shall be per the prescription by the CBDT.

24. Obligation to collect tax at source by seller (Effective Date 1 October 2020):

S 206C (1H) has been inserted whereby every seller, with effect from the 1 October 2020, shall be obligated to collect tax at 0.1% on the value of goods exceeding INR 50 Lakhs, sold by it in the PY. For the purpose of this provision, good shall not include (i) goods exported out of India; or (ii) Alcoholic Liquor for human consumption, tendu leaves, timber obtained under a forest lease, timber obtained by any mode other than under a forest lease, any other forest produce, scrap, minerals being coal or lignite or iron ore; or (iii) motor vehicle; or (iv) the money received by authorized dealer for transfer out of India under Liberalized Remittance Scheme of the RBI or overseas tour programme package.

Further, as per the proviso, in case the buyer fails to furnish its PAN or Aadhaar Number to the seller, the seller shall collect tax at 1% under S 206CC (1).

25. Penalty for false entry etc.:

In consonance with the penal provisions of GST laws in relation to fake invoicing, S 271AAD has been inserted whereby any person whose books of accounts are found to have (i) false entry (viz. forged or falsified documents, invoice without actual supply or receipt of goods or services, invoice relating to supply or receipt of goods or services to non-existent persons etc.); or (ii) omission of any entry which is relevant for computation of total income, shall be liable to penalty of sum equivalent to the aggregate amount of such false or omitted entry. Any person causing to make such false entry shall also be liable to the aforesaid penalty.