Removing dividend distribution tax (DDT) and moving to classical system of taxing dividend in the hands of shareholders/unit holders.
Section 115-O provides that, in addition to the income-tax chargeable in respect of the total income of a domestic company, any amount declared, distributed or paid by way of dividends shall be charged to additional income-tax at the rate of 15 per cent. The tax so paid by the company (called DDT) is treated as the final payment of tax in respect of the amount declared, distributed or paid by way of dividend. Such dividend referred to in section 115-O is exempt in the hands of shareholders under clause (34) of section 10. In case of business trust, specific exemption is provided under sub-section (7) of section 115-O, subject to certain conditions. Similarly, exemption is provided for distributed profits of a unit of an International Financial Service Centre, on fulfilment of certain conditions, under sub-section (8) of section 115-O.
Similarly under section 115R, specified companies and Mutual Funds are liable to pay additional income-tax at the specified rate on any amount of income distributed by them to its unit holders. Such income is then exempt in the hands of unit holders under clause (35) of section 10.
The incidence of tax is, thus, on the payer company/Mutual Fund and not on the recipient, where it should normally be. The dividend is income in the hands of the shareholders and not in the hands of the company. The incidence of the tax should therefore, be on the recipient. Moreover, the present provisions levy tax at a flat rate on the distributed profits, across the board irrespective of the marginal rate at which the recipient is otherwise taxed. The provisions are hence, considered, iniquitous and regressive. The present system of taxation of dividend in the hands of company/ mutual funds was reintroduced by the Finance Act, 2003 (with effect from the assessment year 2004-05) since it was easier to collect tax at a single point and the new system was leading to increase in compliance burden. However, with the advent of technology and easy tracking system available, the justification for current system of taxation of dividend has outlived itself.
In view of above, it is proposed to carry out amendments so that dividend or income from units are taxable in the hands of shareholders or unit holders at the applicable rate and the domestic company or specified company or mutual funds are not required to pay any DDT. It is also proposed to provide that the deduction for expense under section 57 of the Act shall be maximum 20 per cent of the dividend or income from units. Therefore, it is proposed to-
(i) amend section 115-O to provide that dividend declared, distributed or paid after 1st April, 2003, but on or before 31st March, 2020 shall be covered under the provision of this section.
(ii) amend clause (34) of section 10 to provide that the provision of this clause shall not apply to any income, by way of dividend, received on or after 1st April, 2020.
(iii) amend section 115R to provide that the income distributed on or before 31st March, 2020 shall only be covered under the provision of this section.
(iv) amend clause (35) of section 10 to provide that the provision of this clause shall not apply to any income, in respect of units, received on or after 1st April, 2020.
(v) amend clause (23FC) of section 10 so that all dividends received or receivable by business trust from a special purpose vehicle is exempt income under this clause.
(vi) amend clause (23FD) of section 10 to exclude dividend income received by a unit holder from business trust from the exemption so that the dividend income is taxable in the hand of unit holder of the business trust.
(vii) amend sub-section (3) of section 115UA to delete reference to sub-clause (a) so that distributed income of the nature as referred to in clause (23FC) or clause (23FCA) of section 10 shall be deemed to be income of the unit holder and shall be charged to tax as income of the previous year. Thus dividend income distributed by a special purpose vehicle to business trust would be taxed in the hands of unit holder.
(viii) remove reference of section 115-O dividend income in various sections like section 57, section 115A, section 115AC, section 115ACA, section 115AD and section 115C.
(ix) remove the opening line of clause (23D) of section 10, as mutual fund no longer required to pay additional tax.
(x) insert new section 80M as it existed before it removal by the Finance Act, 2003 to remove the cascading affect, with a change that set off will be allowed only for dividend distributed by the company one month prior to the due date of filing of return, in place of due date of filing return earlier.
(xi) amend section 115BBDA which taxes dividend income in excess of ten lakh rupee in the hands of shareholder at ten per cent., to only dividend declared, distributed or paid by a domestic company on or before the 31st day of March, 2020.
(xii) amend section 57 to provide that no deduction shall be allowed from dividend income, or income in respect of units of mutual fund or specified company, other than deduction on account of interest expense and in any previous year such deduction shall not exceed twenty per cent. of the dividend income or income from units included in the total income for that year without deduction under section 57.
(xiii) amend section 194 to include dividend for tax deduction. At the same time the rates of ten per cent. is proposed to be prescribed and threshold is proposed to be increased from Rs 2,500/- to Rs 5,000/- for dividend paid other than cash. Further, at present the mode of payment is given as “an account payee cheque or warrant”. It is proposed to change this to any mode.
(xiv) amend section 194LBA to provide for tax deduction by business trust on dividend income paid to unit holder, at the rate of ten per cent. for resident. For non-resident, it would be 5 per cent for interest and ten per cent. for dividend.
(xv) insert a new section 194K to provide that any person responsible for paying to a resident any income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or units from the administrator of the specified undertaking or units from the specified company shall at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax there on at the rate of ten per cent. It may also be provided for threshold limit of Rs 5,000/- so that income below this amount does not suffer tax deduction. It is also proposed to defined “Administrator”, “specified company”, as already defined in clause (35) of section 10. It is also proposed to define “specified undertaking” as in clause (i) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002. It is also proposed to provide that where any income is credited to any account like suspense account, in the books of account of the person liable to pay such income, the liability for tax deduction under this section would arise at that time.
(xvi) amend section 195 to delete exemption provided to dividend referred to in section 115-O.
(xvii) amend section 196A to revive its applicability on TDS on income in respect of units of a Mutual Fund. It is also proposed to substitute “of the Unit Trust of India” with “from the specified company defined in Explanation to clause (35) of section 10”and “in cash or by the issue of a cheque or draft or by any other mode” with “by any mode”.
(xviii) amend section 196C to remove exclusion provided to dividend under section 115-O. It is also proposed to substitute “in cash or by the issue of a cheque or draft or by any other mode” with “by any mode”.
(xix) amend section 196D to remove exclusion provided to dividend under section 115-O. It is also proposed to substitute “in cash or by the issue of a cheque or draft or by any other mode” with “by any mode”.
Amendments at clause (i) to (xii) above will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years. Amendments at clause (xiii) to (xix) will take effect from 1st April, 2020.
[Clauses 7,30,40,47,48,49,50,54,55,59,60,62,74,80,81,85,86,87 & 88]
Extract of Relevant Clauses of Finance Bill, 2020
Clauses 7
“Clause 7 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.
First proviso to clause (23C) of said section provides for application to be made in prescribed form and manner to the prescribed authority for exemption in respect of income of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of said clause in a case where such income is applied or accumulated during the previous year for certain purposes in accordance with the relevant provisions.
It is proposed to substitute said proviso so as to provide that the exemption to such fund or trust or institution or any university or other educational institution or any hospital or other medical institution shall not be available unless it is approved under the proposed second proviso on an application made in the prescribed form and manner to the Principal Commissioner or Commissioner, for grant of approval where the fund or trust or institution or any university or other educational institution or any hospital or other medical institution is approved under the second proviso (as it stood before its amendment by the Finance Act, 2020), within three months from the date on which this clause has come into force; where the fund or trust or institution or any university or other educational institution or any hospital or other medical institution is approved and the period of such approval is set to expire, at least six months prior to expiry of said period; where the fund or trust or institution or any university or other educational institution or any hospital or other medical institution has been provisionally approved, at least six months prior to expiry of period of the provisional approval or within six months of commencement of its activities, whichever is earlier; in any other case, at least one month prior to commencement of the previous year relevant to the assessment year from which said registration is sought.
Second proviso to clause (23C) of said section thereof provides for the inquiry to be made by the prescribed authority before approving the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of said clause.
It is proposed to substitute the second proviso so as to provide that the Principal Commissioner or Commissioner, on receipt of an application made under the proposed first proviso, shall, where the application is under clause (i) of said proviso, pass an order in writing granting it approval for a period of five years; where the application is under clause (ii) or clause (iii) of said proviso, call for such documents or information from it or make such inquiries as he thinks necessary in order to satisfy himself about, the genuineness of activities of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution and the compliance of such requirements of any other law for the time being in force by it as are material for the purpose of achieving its object; and after satisfying himself about the objects and the genuineness of its activities, under item (A), and compliance of the requirements under item (B), of sub-clause (a), pass an order in writing granting its approval for a period of five years; if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its approval after affording it a reasonable opportunity of being heard;
where the application is under clause (iv) of said proviso, pass an order in writing granting it approval provisionally for a period of three yearsfrom the assessment year from which the registration is sought, and send a copy of such order to the fund or trust or institution or any university or other educational institution or any hospital or other medical institution.
Eighth proviso to clause (23C) thereof, inter alia, provides for period for which a notification issued by Central Government under sub-clause (iv) or sub-clause (v) of said clause shall have effect.
It is proposed to substitute the eighth proviso so as to provide that the approval granted under the proposed second proviso shall apply in relation to the income of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, where the application is made under clause (i) of the first proviso, from the assessment year from which approval was earlier granted to it; where the application is made under clause (iii) of the first proviso, from the first of the assessment years for which it was provisionally approved; in any other case, from the assessment year immediately following the financial year in which such application is made.
Ninth proviso to clause (23C) of said section thereof, inter alia, provides for the period within which a notification under sub-clause (iv) or sub-clause (v) shall be issued or approval under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall be granted or an order rejecting the application made in this behalf shall be passed.
It is proposed to substitute the ninth proviso so as to provide that the order under clause (i), sub-clause (b) of clause (ii) and clause (iii) of the proposed second proviso shall be passed, in such form and manner as may be prescribed, before expiry of period of three months, six months and one month respectively, calculated from the end of the month in which the application was received.
These amendments will take effect from 1st June, 2020.
The tenth proviso to the said clause provides that where the total income, of the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), without giving effect to the provisions of the said sub-clauses, exceeds the maximum amount which is not chargeable to tax in any previous year, such trust or institution or university or other educational institution or hospital or other medical institution shall get its accounts audited in respect of that year by an accountant as defined in the Explanation below sub-section (2) of section 288 and furnish the report of such audit along with the return of income for the relevant assessment year.
It is proposed to amend the said proviso so as to provide that such trust or institution or university or other educational institution or hospital or other medical institution should get the accounts audited before the specified date referred to in section 44AB (i.e. one month prior to the due date for filing of return under sub-section (1) of section 139) and furnish the report of audit by that date.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
Sixteenth proviso to clause (23C) of said section thereof, inter alia, provides for the period within which application for exemption has to be made by the fund or trust or institution or any university or other educational institution or any hospital or other medical institution under the first proviso.
It is proposed to omit the said proviso.
It is further proposed to substitute the existing eighteenth proviso so as to provide that all applications made under the existing first proviso, pending before the Principal Commissioner or Commissioner, on which no order has been passed, shall be deemed to be an application made under clause (iv) of the proposed first proviso on that date.
These amendments will take effect from 1st June, 2020.
Clause (23D) of the said section exempts the income of Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or such other Mutual Funds. This exemption is subject to the provisions of Chapter XII-E relating to special provision relating to tax on distributed income. It is proposed to omit the reference of the said Chapter in the said clause so that Mutual Funds are not required to pay additional tax under that Chapter.
Clause (23FC) of the said section exempts certain income of business trust including income by way of dividend referred to in sub-section (7) of section 115-O. It is proposed to amend the said clause so as to exempt all dividend received or receivable by business trust from a special purpose vehicle under the said clause.
Clause (23FD) of the said section exempts income distributed by business trust to a unit holder except the interest and rental income. It is proposed to amend the said clause so as to exclude dividend income received by a unit holder from business trust from such exemption.
It is proposed to insert a new clause (23FE) in the said section so as to provide exemption in respect of any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or equity, if the investment––
(i) is made on or before the 31st day of March, 2024;
(ii)is held for at least three years; and
(iii) is in a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating or maintaining any infrastructure facility as defined in the Explanation to clause (i) of subsection (4) of section 80-IA or such other business as may be notified by the Central Government in this behalf.
It is further proposed to insert an Explanation to the said clause so as to define “specified person” for the purposes of this clause to mean––
(a) a wholly owned subsidiary of the Abu Dhabi Investment Authority which––
(i) is a resident of the United Arab Emirates; and
(ii) makes investment, directly or indirectly, out of the fund owned by the Government of the United Arab Emirates;
(b) sovereign wealth fund which shall qualify the conditions specified therein.
Clause(34) of the said section exempts income by way of dividends referred to in section 115-O except the income by way of dividend chargeable to tax in accordance with the provisions of section 115BBDA. It is proposed to amend the said clause so as to provide that the provisions of the said
clause shall not apply to any income, by way of dividend, received on or after the 1st April, 2020.
Clause(35) of the said section exempts income received in respect of the units of a Mutual Fund, units from the Administrator of the specified undertaking and units from the specified company. It is proposed to amend this clause to provide that the provisions of the said clause shall not apply to any income, in respect of units, received on or after the 1st April, 2020.
It is also proposed to omit clause (45) of the said section, which provides that any allowance and perquisite as may be notified by the Central Government, paid to the serving or retired Chairman or Members of Union Public Services Commission shall be exempt from income-tax.
These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
It is proposed to insert a new clause (48C) in said section so as to provide exemption in respect of any income accruing or arising to Indian Strategic Petroleum Reserves Limited, being a wholly owned subsidiary of Oil Industry Development Board under the Ministry of Petroleum and Natural Gas, as a result of arrangement for replenishment of crude oil stored in its storage facility in pursuance of directions of the Central Government in this behalf.
It is further proposed to insert a proviso to newly inserted clause so as to provide that nothing contained in this clause shall apply to an arrangement if the crude oil is not replenished in the storage facility within three years from the end of the financial year in which the crude oil was removed from the storage facility for the first time.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.”
Clause 30
“Clause 30 of the Bill seeks to amend section 57 of the Income-tax Act relating to deductions.
Clause (i) of the said section allows deduction of any reasonable sum for the purpose of realising such dividend except the dividend referred to in section 115-O. It is proposed to omit the reference of dividend referred to in section 115-O.
It is further proposed to insert a proviso to the said section so as to provide that no deduction shall be allowed from the dividend income, or income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of units from a specified company defined in the Explanation to clause (35) of section 10, other than deduction on account of interest expense and in any previous year such deduction shall not exceed twenty per cent. of the dividend income, or income in respect of such units, included in the total income for that year without deduction under that section.
These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 40
“Clause 40 of the Bill seeks to insert new section 80M relating to deduction in respect of certain inter-corporate dividends.
Sub-section (1) of the said new section provides that where the gross total income of a domestic company in any
previous year includes any income by way of dividends from any other domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date.
Sub-section (2) of the said section provides that where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.
It is further proposed to clarify the expression “due date” to mean the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 47
“Clause 47 of the Bill seeks to amend section 115A of the Income-tax Act relating to tax on dividends, royalty and technical service fees in the case of foreign companies.
The said section, interalia, provides for taxation of dividend excluding dividends referred to in section 115-O. It is proposed to omit the reference of dividends referred to in section 115-O so that all dividend income is taxed in the hands of non-resident (not being a company) or a foreign company.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
Sub-section (1) of the said section provides for the determination of tax in case of a non-resident whose total income consists of dividends or interest payments as specified in clause (a) of the said sub-section and royalty or fees for technical services as specified in clause (b) of the said sub-section.
Sub-section (5) of the said section provides that a non-resident will not be required to furnish its return of income under sub-section (1) of section 139 of the Income-tax Act, if the conditions in clause (a) and clause (b) of said subsection are satisfied.
The condition under clause (a) of said sub-section requires that the total income of a non-resident should consist only of income in the nature of dividends or interest as referred to in clause (a) of sub-section (1) of the said section.
It is proposed to amend clause (a) of the said subsection so as to provide that the total income of the non-resident should consist only of the income in the nature of dividend or interest as referred to in clause (a) of sub-section (1) of the said section or income in the nature of royalty or fee for technical services as referred to in clause (b) of subsection (1) of the said section.
The condition under clause (b) of said sub-section requires that the tax deductible at source on such income as referred to in clause (a) of sub-section (1) of the said section has been deducted as per the provisions of Part B of Chapter XVII of the Income-tax Act.
It is further proposed to amend clause (b) of the said sub-section so as to provide that the tax deductible at source on income referred to in clause (a) or clause (b) of subsection (1) of the said section, has been done under the provisions of Chapter XVII at the rates which are not less than the rate specified under clause (a) or clause (b) of subsection (1) of the said section.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.”
Clause 48
“Clause 48 of the Bill seeks to amend section 115AC of the Income-tax Act relating to tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.
The said section, inter-alia, provides for taxation of dividend excluding dividends referred to in section 115-O. It is proposed to omit the reference of dividends referred to in section 115-O so that all dividend income is taxed in the hands of non-resident.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 49
“Clause 49 of the Bill seeks to amend section 115ACA of the Income-tax Act relating to tax on income from Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.
The said section, inter alia, provides for taxation of dividend excluding dividends referred to in section 115-O. It is proposed to omit the reference of dividends referred to in section 115-O so that all dividend income is taxed in the hands of non-resident.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 50
“Clause 50 of the Bill seeks to amend section 115AD of the Income-tax Act relating to tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer.
The said section, interalia, provides for taxation of dividend excluding dividends referred to in section 115-O. It is proposed to omit the reference of income by way of dividends referred to in section 115-O so that all dividend income is taxed in the hands of Foreign Institutional Investors.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 54
“Clause 54 of the Bill seeks to amend section 115BBDA of the Income-tax Act relating to tax on certain dividends received from domestic companies.
The said section provides for taxation of dividend exceeding ten lakh rupees in the hands of specified assessee resident in India at the rate of ten per cent.
It is proposed to amend the said section so as to restrict the applicability of the provisions of that section to dividend declared, distributed or paid by a domestic company or companies on or before the 31st day of March, 2020.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
Sub-clause (iii) of clause (b) of Explanation to aforesaid section provides “specified assessee” for the purposes of said section, to mean a person other than a trust or institution registered under section 12A or section 12AA.
It is proposed to make a reference to section 12AB in the said sub-clause so as to provide that “specified assessee” for the purposes of said section, shall mean a person other than a trust or institution registered under section 12AB, as well.
This amendment will take effect from 1st June, 2020.”
Clause 55
“Clause 55 of the Bill seeks to amend section 115C of the Income-tax Act relating to definitions.
Clause (c) of the said section defines the expression “investment income” for the purposes of Chapter XII-A to
mean any income derived other than dividends referred to in section 115-O from a foreign exchange asset.
It is proposed to amend the said clause to omit the reference of dividend referred to in section 115-O so as to define “investment income” to mean any income derived from a foreign exchange asset.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 59
“Clause 59 of the Bill seeks to amend section 115-O of the Income-tax Act relating tax on distributed profits of domestic companies.
The said section provides for levy of additional income tax on any amount declared, distributed or paid by a domestic company by way of dividend (whether interim or otherwise), whether out of current or accumulated profits. The dividend declared, distributed or paid on or after the 1st day of April, 2003 is covered under the provisions of the said section.
It is proposed to amend sub-section (1) of the said section so as to provide that dividend declared, distributed or paid on or after the 1st day of April, 2003 but on or before the 31st day of March, 2020 shall be covered under the provisions of the said section.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 60
“Clause 60 of the Bill seeks to amend section 115R of the Income-tax Act relating to tax on distributed income to unit holders.
The said section, interalia, provides for levy of additional income-tax on any income distributed by the specified company or a Mutual Fund to its unit holders.
It is proposed to amend sub-section (2) of the said section so as to provide that the income distributed on or before the 31st day of March, 2020 shall only be covered under the provisions of that section.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 62
“Clause 62 of the Bill seeks to amend section 115UA of the Income-tax Act relating to tax on income of unit holder and business trust.
The said section enables pass through of the income of certain nature from business trust to its unit holders. Sub-section (3) of the said section provides that if in any previous year, the distributed income or any part thereof, received by a unit holder from the business trust is of the nature as referred to in sub-clause (a) of clause (23FC) or clause (23FCA), of section 10, then, such distributed income or part thereof shall be deemed to be the income of such unit holder and shall be charged to tax as income of the previous year.
It is proposed to omit the reference of sub-clause (a) of clause (23FC) of section 10 from the said sub-section so as to provide that the distributed income of the nature as referred to in clause (23FC) or clause (23FCA) of section 10 shall be deemed to be income of unit holder and shall be charged to tax as income of the previous year.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 74
“Clause 74 of the Bill seeks to amend section 194 of the Income-tax Act relating to dividends.
The said section, inter alia, provides that the principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment in cash or before issuing any cheque or warranty in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rates in force.
It is proposed to amend the said section so as to bring the payment by any mode within the ambit of that section and also to provide for deduction at the rate of ten per cent. instead of the rates in force.
It is further proposed to amend the first proviso to the said section so as to provide for payment of dividend by the company by any mode and to increase the threshold limit thereof from two thousand five hundred rupees to five thousand rupees.
It is also proposed to consequentially omit the third proviso to the said section.
These amendments will take effect from 1st April, 2020.”
Clause 80
“Clause 80 of the Bill seeks to insert a new section 194K relating to income in respect of units.
The said section, inter alia, provides that any person responsible for paying to a resident any income in respect of––
(i) units of a Mutual Fund specified under clause (23D) of section 10; or
(ii) units from the Administrator of the specified undertaking; or
(iii) units from the specified company,
shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.
It is further proposed to provide that the provisions of the said section shall not apply where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person responsible for making the payment to the account of, or to, the payee does not exceed five thousand rupees.
It is also proposed to define the expressions “Administrator”, “specified company” and “specified undertaking” and to clarify that where any income referred to in the said section is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
This amendment will take effect from 1st April, 2020.”
Clause 81
“Clause 81 of the Bill seeks to amend section 194LBA of the Income-tax Act relating to certain income from units of a business trust.
The said section, inter alia, requires business trust to deduct tax on distribution of income, referred to in section 115UA, being of the nature referred to in sub-clause (a) of clause (23FC) or clause (23FCA) of section 10, at the rate of ten per cent. to a resident and at the rate of five per cent. to a non-resident (not being a company) or a foreign company, respectively.
It is proposed to amend the said section so as to omit the reference of sub-clause (a) of clause (23FC) of section 10 from the said section. Thus, liability to deduct tax shall be applicable on distribution of income referred to in section 115UA, being of the nature referred to in clause (23FC) or clause (23FCA) of section 10, to a resident and to a nonresident (not being a company) or a foreign company.
It is further proposed to amend sub-section (2) of the said section to provide that the tax is to be deducted at the rate of five per cent. in case of income the nature referred to in sub-clause (a) of clause (23FC) of section 10 and at the rate of ten per cent. in case of income of the nature referred to in sub-clause (b) of the said clause.
These amendments will take effect from 1st April, 2020.”
Clause 85
“Clause 85 of the Bill seeks to amend section 195 of the Income-tax Act relating to other sums.
The second proviso of sub-section (2) of the said section provides that no deduction under that section shall be made in respect of any dividends referred to in section 115-O.
It is proposed to consequentially omit the said proviso.
This amendment will take effect from 1st April, 2020.”
Clause 86
“Clause 86 of the Bill seeks to amend section 196A of the Income-tax Act relating to income in respect of units of nonresidents.
Sub-section (1) of the said section provides that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any income in respect of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent.
It is proposed to amend the said sub-section to substitute the expression “Unit Trust of India” referred to in the said sub-section with “specified company referred to in the Explanation to clause (35) of section 10; and to enable credit of income or payment thereof by any mode.
Proviso to this sub-section provides that no deduction shall be made under this section from any such income credited or paid on or after the 1st day of April, 2003.
It is further proposed to omit the proviso to the said sub-section.
These amendments will take effect from 1st April, 2020.”
Clause 87
“Clause 87 of the Bill seeks to amend section 196C of the Income-tax Act relating to income from foreign currency bonds or shares of Indian company.
The said section provides that where any income by way of interest or dividends in respect of bonds or Global Depository Receipts referred to in section 115AC or by way of long-term capital gains arising from the transfer of such bonds or Global Depository Receipts is payable to a nonresident, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.
It is proposed to amend said section so as to enable credit of income or payment thereof by any mode.
It is further proposed to omit the proviso to the said section.
These amendments will take effect from 1st April, 2020.”
Clause 88
“Clause 88 of the Bill seeks to amend section 196D of the Income-tax Act relating to income of Foreign Institutional Investors from securities.
The said section, interalia, provides that where any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD, not being income by way of interest referred to in section 194LD, is payable to a Foreign Institutional Investor, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent.
It is proposed to amend sub-section (1) of the said section so as to enable credit of income or payment thereof by any mode.
It is further proposed to omit the proviso to the said sub-section.
These amendments will take effect from 1st April, 2020.”
Extract of Relevant Amendment Proposed by Finance Bill, 2020
7. Amendment of section 10.
In section 10 of the Income-tax Act,–
(I) in clause (23C),–
(A) with effect from the 1st day of June, 2020,–
(a) for the first and second provisos, the following provisos shall be substituted, namely:–
“Provided that the exemption to the fund or trust or institution or university or other educational institution or hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) under the respective sub-clauses shall not be available to it unless such fund or trust or institution or university or other educational institution or hospital or other medical institution makes an application in the prescribed form and manner to the Principal Commissioner or Commissioner, for grant of approval,––
(i) where such fund or trust or institution or university or other educational institution or hospital or other medical institution is approved under the second proviso [as it stood immediately before its amendment by the Finance Act, 2020], within three months from the date on which this clause has come into force;
(ii) where such fund or trust or institution or university or other educational institution or hospital or other medical institution is approved and the period of such approval is due to expire, at least six months prior to expiry of the said period;
(iii) where such fund or trust or institution or university or other educational institution or hospital or other medical institution has been provisionally approved, at least six months prior to expiry of the period of the provisional approval or within six months of commencement of its activities, whichever is earlier;
(iv) in any other case, at least one month prior to the commencement of the previous year relevant to the assessment year from which the said approval is sought, and the said fund or trust or institution or university or other educational institution or hospital or other medical institution is approved under the second proviso:
Provided further that the Principal Commissioner or Commissioner, on receipt of an application made under the first proviso, shall,—
(i) where the application is made under clause (i) of the said proviso, pass an order in writing granting approval to it for a period of five years;
(ii) where the application is made under clause (ii) or clause (iii) of the said proviso,–
(a) call for such documents or information from it or make such inquiries as he thinks necessary in order to satisfy himself about
(A) the genuineness of activities of such fund or trust or institution or university or other educational institution or hospital or other medical institution; and
(B) the compliance of such requirements of any other law for the time being in force by it as are material for the purpose of achieving its objects; and
(b) after satisfying himself about the objects and the genuineness of its activities under item (A), and compliance of the requirements under item (B), of sub-clause (a),––
(A) pass an order in writing granting approval to it for a period of five years;
(B) if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its approval after affording it a reasonable opportunity of being heard;
(iii) where the application is made under clause (iv) of the said proviso, pass an order in writing granting approval to it provisionally for a period of three years from the assessment year from which the registration is sought, and send a copy of such order to the fund or trust or institution or university or other educational institution or hospital or other medical institution:”;
(b) for the eighth and ninth provisos, the following provisos shall be substituted, namely:––
“Provided also that any approval granted under the second proviso shall apply in relation to the income of the fund or trust or institution or university or other educational institution or hospital or other medical institution,––
(i) where the application is made under clause (i) of the first proviso, from the assessment year from which approval was earlier granted to it;
(ii) where the application is made under clause (iii) of the first proviso, from the first of the assessment years for which it was provisionally approved;
(iii) in any other case, from the assessment year immediately following the financial year in which such application is made:
Provided also that the order under clause (i), sub-clause (b) of clause (ii) and clause (iii) of the second proviso shall be passed, in such form and manner as may be prescribed, before expiry of the period of three months, six months and one month, respectively, calculated from the end of the month in which the application was received:”;
(B) in the tenth proviso, for the words and figures “section 288 and furnish along with the return of income for the relevant assessment year”, the words, figures and letters “section 288 before the specified date referred to in section 44AB and furnish by that date” shall be substituted;
(C) with effect from the 1st day of June, 2020,–
(a) the sixteenth proviso shall be omitted;
(b) for the eighteenth proviso, the following proviso shall be substituted, namely:–
“Provided also that all applications made under the first proviso [as it stood before its amendment by the Finance Act, 2020] pending before the Principal Commissioner or Commissioner, on which no order has been passed before the date on which the first proviso has come into force, shall be deemed to be an application made under clause (iv) of the first proviso on that date:”;
(II) with effect from the 1st day of April, 2021,–
(a) in clause (23D), in the opening portion, the words, figures and letter “subject to the provisions of Chapter XII-E,” shall be omitted;
(b) in clause (23FC), in sub-clause (b), for the words, brackets, figures and letter “referred to in sub-section (7) of section 115-O”, the words “received or receivable from a special purpose vehicle” shall be substituted;
(c) in clause (23FD), the words, brackets and letter “sub-clause (a) of” shall be omitted;
(d) after clause (23FD), the following clause shall be inserted, namely:–
‘(23FE) any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or equity, if the investment–
(i) is made on or before the 31st day of March, 2024;
(ii) is held for at least three years; and
(iii) is in a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA or such other business as the Central Government may, by notification in the Official Gazette, specify in this behalf.
Explanation.—For the purposes of this clause, “specified person” means–
(a) a wholly owned subsidiary of the Abu Dhabi Investment Authority which–
(i) is a resident of the United Arab Emirates; and
(ii) makes investment, directly or indirectly, out of the fund owned by the Government of the United Arab Emirates;
(b) a sovereign wealth fund which satisfies the following conditions, namely:–
(i) it is wholly owned and controlled, directly or indirectly, by the Government of a foreign country;
(ii) it is set up and regulated under the law of such foreign country;
(iii) the earnings of the said fund are credited either to the account of the Government of that foreign country or to any other account designated by that Government so that no portion of the earnings inures any benefit to any private person;
(iv) the asset of the said fund vests in the Government of such foreign country upon dissolution;
(v) it does not undertake any commercial activity whether within or 15 outside India; and
(vi) it is specified by the Central Government, by notification in the Official Gazette, for this purpose;’;
(e) in clause (34), after the proviso, the following proviso shall be inserted, namely:-
“Provided further that nothing contained in this clause shall apply to any income by way of dividend received on or after the 1st day of April, 2020;”;
(f) in clause (35), after the proviso, the following proviso shall be inserted, namely:–
“Provided further that nothing contained in this clause shall apply to any income in respect of units received on or after the 1st day of April, 2020;”;
(g) clause (45) shall be omitted;
(III) after clause (48B), the following clause shall be inserted, namely:–
“(48C) any income accruing or arising to the Indian Strategic Petroleum Reserves Limited, being a wholly owned subsidiary of the Oil Industry Development Board under the Ministry of Petroleum and Natural Gas, as a result of arrangement for replenishment of crude oil stored in its storage facility in pursuance of directions of the Central Government in this behalf:
Provided that nothing contained in this clause shall apply to an arrangement, if the crude oil is not replenished in the storage facility within three years from the end of the financial year in which the crude oil was removed from the storage facility for the first time;”.
30. Amendment of section 57.
In section 57 of the Income-tax Act, with effect from the 1st day of April, 2021,––
(a) in clause (i), for the words, figures and letter “dividends, other than dividends referred to in section 115-O”, the word “dividends” shall be substituted;
(b) the following proviso shall be inserted, namely:––
“Provided that no deduction shall be allowed from the dividend income, or income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of units from a specified company defined in the Explanation to clause (35) of section 10, other than deduction on account of interest expense, and in any previous year such deduction shall not exceed twenty per cent. of the dividend income, or income in respect of such units, included in the total income for that year, without deduction under this section.”.
40. Insertion of new section 80M. Deduction in respect of certain intercorporate dividends.
After section 80LA of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2021, namely:–
‘80M. (1) Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date.
(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.
Explanation.– For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.’.
47. Amendment of section 115A.
In section 115A of the Income-tax Act,–
(I) in sub-section (1), in clause (a), the words, figures and letter “other than dividends referred to in section 115-O” at both the places where they occur, shall be omitted with effect from the 1st day of April, 2021;
(II) in sub-section (5),–
(i) in clause (a), for the word, brackets and letter “clause (a)”, the words, brackets and letters “clause (a) or clause (b)” shall be substituted;
(ii) for clause (b), the following clause shall be substituted, namely:–
“(b) the tax deductible at source under the provisions of Part B of Chapter XVII has been deducted from such income and the rate of such deduction is not less than the rate specified under clause (a) or, as the case may be, clause (b) of sub-section (1).”.
48. Amendment of section 115AC.
In section 115AC of the Income-tax Act, for the words, figures and letter “dividends, other than dividends referred to in section 115-O” wherever they occur, the word “dividends” shall be substituted with effect from the 1st day of April, 2021.
49. Amendment of section 115ACA.
In section 115ACA of the Income-tax Act, for the words, figures and letter “dividends, other than dividends referred to in section 115-O” wherever they occur, the word “dividends” shall be substituted with effect from the 1st day of April, 2021.
50. Amendment of section 115AD.
In section 115AD of the Income-tax Act, in sub-section (1), in clause (a), the words, figures and letter “other than income by way of dividends referred to in section 115-O” shall be omitted with effect from the 1st day of April, 2021.
54. Amendment of section 115BBDA.
In section 115BBDA of the Income-tax Act,––
(a) in sub-section (1), for the words “or companies”, the words, figures and letters “or companies on or before the 31st day of March, 2020” shall be substituted with effect from the 1st day of April, 2021;
(b) in the Explanation, in clause (b), in sub-clause (iii), for the words, figures and letters “under section 12A or section 12AA”, the words, figures and letters “under section 12A or section 12AA or section 12AB” shall be substituted with effect from the 1st day of June, 2020.
55. Amendment of section 115C.
In section 115C of the Income-tax Act, in clause (c), the words, figures and letter “other than dividends referred to in section 115-O” shall be omitted with effect from the 1st day of April, 2021.
59. Amendment of section 115-O.
In section 115-O of the Income-tax Act, in sub-section (1), after the words, figures and letters “on or after the 1st day of April, 2003”, the words, figures and letters “but on or before the 31st day of March, 2020” shall be inserted with effect from the 1st day of April, 2021.
60. Amendment of section 115R.
In section 115R of the Income-tax Act, in sub-section (2), after the words “or a Mutual Fund to its unit holders”, the words, figures and letters “on or before the 31st day of March, 2020” shall be inserted with effect from the 1st day of April, 2021.
62. Amendment of section 115UA.
In section 115UA of the Income-tax Act, in sub-section (3), the words, brackets and letter “sub-clause (a) of” shall be omitted with effect from the 1st day of April, 2021.
74. Amendment of section 194.
In section 194 of the Income-tax Act,––
(A) for the words “in cash or before issuing any cheque or warrant”, the words “by any mode” shall be substituted;
(B) for the words “at the rates in force”, the words “at the rate of ten per cent.” shall be substituted;
(C) in the first proviso,––
(i) in clause (a), for the words “an account payee cheque”, the words “any mode other than cash” shall be substituted;
(ii) in clause (b), for the words “two thousand five hundred rupees”, the words “five thousand rupees” shall be substituted;
80. Insertion of new section 194K.
After section 194J of the Income-tax Act, the following section shall be inserted, namely:-
Income in respect of units.
‘194K. Any person responsible for paying to a resident any income in respect of–
(a) units of a Mutual Fund specified under clause (23D) of section 10; or
(b) units from the Administrator of the specified undertaking; or
(c) units from the specified company, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.:
Provided that the provisions of this section shall not apply where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person responsible for making the payment to the account of, or to, the payee does not exceed five thousand rupees.
Explanation 1.—For the purposes of this section,—
(a ) “Administrator” means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
(b) “specified company” means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
(c) “specified undertaking” shall have the meaning assigned to it in clause (i) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.
Explanation 2.– For the removal of doubts, it is hereby clarified that where any income referred to in this section is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.’.
81. Amendment of section 194LBA.
In section 194LBA of the Income-tax Act,––
(a) the words, brackets and letter “sub-clause (a) of” at both the places where they occur shall be omitted;
(b) in sub-section (2), for the words “five per cent.”, the words, brackets and letters “five per cent. in case of income of the nature referred to in sub-clause (a) and ten per cent. in case of income of the nature referred to in sub-clause (b), of the said clause” shall be substituted.
85. Amendment of section 195.
In section 195 of the Income-tax Act, in sub-section (1), the second proviso shall be omitted.
86. Amendment of section 196A.
In section 196A of the Income-tax Act, in sub-section (1),–
(a) for the words “of the Unit Trust of India”, the words, brackets and figures “from the specified company referred to in the Explanation to clause (35) of section 10” shall be substituted;
(b) for the words “in cash or by the issue of a cheque or draft or by any other mode”, the words “ by any mode” shall be substituted;
(c) the proviso shall be omitted.
87. Amendment of section 196C.
In section 196C of the Income-tax Act,––
(a) for the words “in cash or by the issue of a cheque or draft or by any other mode”, the words “by any mode” shall be substituted;
(b) the proviso shall be omitted.
88. Amendment of section 196D.
In section 196D of the Income-tax Act, in sub-section (1),––
(a) for the words “in cash or by the issue of a cheque or draft or by any other mode”, the words “by any mode” shall be substituted;
(b) the proviso shall be omitted.
