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A basic question: Let's suppose in a section it is written that this section is applicable from 01/04/2012, then what does it mean?

The answer is that this section is applicable from assessment year: 2012-13 and not from previous year: 2012-13, as lawmakers never talk in terms of previous year, they always talk in terms of assessment year.

Income Tax Rates

In the case of every individual (being less than age of 60 years) or Hindu undivided family or every association of persons or body of individuals, or every artificial juridical person, the rates of income tax are as follows:


Total Income

Tax Rate

Upto Rs. 250000/-

NIL

Rs. 250001 to Rs. 500000/-

5%

Rs. 500001 to Rs. 1000000/-

20%

Above Rs. 1000000/-

30%


For individuals who are age of 60 years or more but less than 80 years, the rates are as follows:


Total Income

Tax Rate

Upto Rs. 300000/-

NIL

Rs. 300001 to Rs. 500000/-

5%

Rs. 500001 to Rs. 1000000/-

20%

Above Rs. 1000000/-

30%


The reason for dropping tax rate from 10% to 5% is to ensure more compliance regarding return filing, as the finance minister termed the nation as non-compliant nation, which is true in every term. Due to this rate drop, the people will get encouraged to file the return and ultimately the tax bracket will get broader.

Rationalization of rebate u/s 87A

In view of proposed rationalization of tax rates for individuals in the income slab of Rs. 2,50,000 to Rs. 5,00,000, section 87A is amended to reduce the maximum amount of rebate available under this section from  existing Rs. 5,000 to Rs. 2,500. It is also proposed to provide that this rebate shall be available to only resident individuals whose total income does not exceed Rs. 3,50,000.

So,  there is effectively no tax on assessee being individual less than age of 60 years having total income upto Rs. 300000/-.

The reason for this amendment is to meet out a part of shortfall in revenue collection by the Government due to lowering of income tax rates of various assessees.

Lowering tax rates for Micro, Small & Medium Enterprises

The income tax rate of corporate assessees having turnover upto Rs. 50 crores has been dropped from 30% to 25%. This move is welcomed by the corporate sector with open arms. The effect of this amendment will be as follows:

  • 96% of the total companies registered in India will get benefit due to this amendment.
  • It will provide Micro, Small & Medium Enterprises a level playing field with foreign companies as the cost of goods and services supplied will be lower.
  • India's corporate tax rate (i.e. 34.608%) is much higher than average @18% of the rest of the world, so it's a step towards bridging that gap and bringing India on the same level with that of world.

Surcharges

The amount of income tax shall be increased by surcharge in the case of every individual or Hindu undivided family or every association of persons or body of individuals, whether incorporated or not by following rates:

Where total income exceeds Rs. 50,00,000 but does not exceed Rs. 1 crore: Surcharge @10% of tax
Where total income exceeds Rs. 1 crore: Surcharge @15% of tax
(Earlier surcharge @ 12% was levied when total income exceeded Rs. 1 crore)
All the remaining rates of surcharge have been kept same.

The reason for the increase in surcharge rate as aforementioned is to recover more amount from the people of richer category so as to compensate the revenue losses on account of drops in income tax rates.

Incentive for investment in immovable property

The existing provision of the Act provide for concessional rate of tax and also indexation of capital gains arising from transfer of long term capital asset. With a view to promote the real-estate sector and to make it more attractive for investment, it is proposed to amend section 2(42A) of the Act so as to reduce the period of holding from the existing 36 months to 24 months in case of immovable property, being land or building or both, to qualify as long term capital asset.

E.g.: If a property is purchased on 01/02/2015 for Rs. 50,00,000 and sold on 10/02/2017 for Rs. 70,00,000, then as per earlier provision, this asset would have been short term capital asset as it has not been held for more than 36 months and taxation will be as follows:

Short term capital gains = Rs. 20,00,000 (Rs. 70,00,000 – Rs. 50,00,000)

Tax thereon: Rs. 6,00,000 (30% of Rs. 20,00,000, as the assessee's total income will definitely fall in 30% tax bracket after including this income)

After the amendment,
Since the asset has been held for more than 24 months, the asset is a long term capital asset.
Long term capital gains = Rs. 20,00,000 (ignoring indexation)
Tax thereon: Rs. 4,00,000 (20% of Rs. 20,00,000)

So, due to this amendment there is a tax benefit of roughly Rs. 2,00,000 in aforementioned example.

Shifting base year from 1981 to 2001

In Section 55, the assessee has following 2 options to arrive at cost of acquisition for assets purchased prior to 01/04/1981:

  • Either to take actual cost as cost of acquisition or
  • To take fair market value as on 01/04/1981 as cost of acquisition.

Due to some practical reasons, the second option is more appealing to the assessees as using this option cost of acquisition generally comes higher, but then a problem arises that how to calculate the fair market value of the asset as on 01/04/1981 precisely.

So, to tackle this very problem, there is an amendment in Section 55, so as to provide that the assessee will have following 2 options to arrive at cost of acquisition for assets purchased prior to 01/04/2001:

  • Either to take actual cost as cost of acquisition or
  • To take fair market value as on 01/04/2001 as cost of acquisition.

Now to calculate fair market value as on 01/04/2001 is much easier than to calculate it on 01/04/1981 and will give clearer picture.

On the similar lines as earlier, the cost of improvements incurred prior to 01/04/2001 shall be ignored totally.

Expanding the scope of long term bonds u/s 54EC

The existing provision provides that capital gain to the extent of Rs. 50 lakhs arising from the transfer of a long-term capital asset shall be exempt if the assessee invests the whole or any part of capital gains in certain specified bonds, within the specified time. Currently, investment in bond issued by the National Highway Authority of India or by the Rural Electrification Corporation Limited is eligible for exemption under this section.

In order to widen the scope of the section which may raise fund by issue of bonds eligible for exemption under section 54EC, it is proposed to amend section 54EC so as to provide that investment in any bond redeemable after three years which has been notified by the Government in this behalf.

The reason for this amendment is to promote investment in the notified long term bonds.

Insertion of new section 50CA

Under the existing provisions of the Act, income chargeable under the head "Capital Gains" is computed by taking into the account the amount of the full value of consideration received or accrued on transfer of a capital asset. In order to ensure that the full value of consideration is not understated, the Act also contained provisions for deeming of stamp duty value as full value of consideration for transfer of immovable property in certain cases.

In order to rationalize the provisions relating to deeming of full value of consideration for computation of income under the head "Capital Gains", it is proposed to insert a new section 50CA to provide that where consideration for transfer of a share of a company (other than quoted share) is less than the fair market value (FMV) of such share, the FMV shall be deemed to be the full value of consideration for the purposes of computing income under the head "Capital Gains". In short, the crux is as follows:

  • Section is applicable on sale of unquoted shares where sales consideration is less than FMV,
  • FMV shall be deemed as full value of consideration for the purpose of calculating capital gains.

Measures to ensure timely returns (Insertion of Section 234F)

In order to ensure that return is filed within due date, it is proposed to insert a new section 234F in the Act to provide that a fee for delay in furnishing of return shall be levied for assessment year 2018-19 and onwards where the return is not filed within the due dates specified for filing of return u/s 139(1). The proposed fee structure is as follows:

  • A fee of five thousand rupees shall be payable, if the return is furnished after the due date but on or before the 31st day of December of the assessment year;
  • A fee of ten thousand rupees shall be payable in other cases.

However, in a case where the total income does not exceed five lakh rupees, it is proposed that the fee amount shall not exceed one thousand rupees.

The fee as aforementioned is to be deposited prior to return filing and consequentially section 140A is to be amended. The reason for insertion of this section is to ensure timely returns and to distress department from last day hassles.

Conversion of Preference Shares into Equity Shares

In order to provide tax neutrality to the conversion of preference share of a company into equity share of that company, section 47 has been amended to provide that the conversion of preference share of a company into equity share shall not be regarded as transfer.

Consequential amendments are also proposed in section 49 and section 2(42A) in respect of cost of acquisition and period of holding.

The reason for this amendment is that the start-up investors prefer to invest in convertible preference shares in initial stages to be assured about returns, later on they convert into equity, but at present this conversion gets taxed and hence the investors get demoralized to invest in start ups, which ultimately becomes the reason for failure of the start ups. Now when the conversion will not be considered as transfer, the investors will get motivated to invest in convertible preference shares first and then convert those into equity shares.

Enabling of filing of Form 15G/15H for commission payments specified under section 194D

Section 194D of the Act provides for TDS @5% for payments in nature of insurance commission beyond a threshold limit of Rs. 15,000 per year. Further, section 197A provides that tax shall not be deducted; if the recipient of certain payments furnishes a self-declaration in Form 15G/15H declaring that tax on his estimated total income of relevant previous year will be nil.

In order to reduce compliance burden in the case of individuals and HUFs, it is proposed to amend section 197A so as to make them eligible for filing self-declaration in Form 15G/15H for non-deduction of tax at source in respect of insurance commission referred to in section 194D.

Restriction on cash transactions

In order to achieve the mission of the Government to move towards a less cash economy to reduce generation and circulation of black money, it is proposed to insert section 269ST in the Act to provide that no person shall receive an amount of three lakh rupees or more-

  • In aggregate from a person in a day;
  • In respect of a single transaction; or
  • In respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.

The restriction shall not apply to Government, any banking company, post office savings bank or co-operative bank.

With insertion of section 271DA in the Act to provide for levy of penalty on a person who receives a sum in contravention of the provisions of the section 269ST. The penalty is proposed to be 100% of the amount received.

Measures to discourage cash payments

Existing provision of section 40A(3) disallows any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, shall not be allowed as a deduction.

Further, section 40A(3A) also provides for deeming payments as profits if expenditure is incurred in a particular year but the payment is made in subsequent year of a sum exceeding twenty thousand rupees otherwise than by account payee cheque drawn on a bank or a account payee bank draft.

In order to disincentivize cash transactions, it is proposed

  • to replace Rs. 20,000 by Rs. 10,000 in both the sub-sections aforementioned and
  • to expand the specified mode of payment and include the use of electronic clearing system through a bank account as an acceptable mode.

Discouraging cash donations

Under section 80G, deduction is not allowed in respect of donation made of any sum exceeding Rs. 10,000, if it is paid in cash.

In order to provide cash less economy and transparency, section 80G is amended to replace Rs. 10,000 by Rs. 2,000.

So, now donation made in excess of Rs. 2,000 in cash will not be allowed as deduction.

Measures for promoting digital payments in case of small unorganized businesses

The provisions of section 44AD provide for presumptive income in case of eligible assessees carrying out eligible businesses. Under this scheme, assessee engaged in eligible business having total turnover or gross receipts upto Rs. 2 crores rupees in a previous year, a sum equal to or more than 8% of total turnover or gross receipts, as declared by assessee is deemed to be profits and gains from business or profession.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, Section 44AD is amended to reduce the existing rate of 8% to 6% in respect of amount of total turnover or gross receipts received through banking channels. For remaining turnover or receipts the existing rate of 8% shall continue to apply.

Penalty for furnishing incorrect information in statutory report or certificate

The thrust of the Government in recent past is on voluntary compliance. Certification of various reports and certificates by a qualified professional has been provided in the Act to ensure that the information furnished by an assessee under the provisions of the Act is correct. There exist no penal provision for levy of penalty for furnishing incorrect information by the person who is responsible for certifying the same.

In order to ensure that the person furnishing report or certificate undertakes due diligence before making such certification, a new section 271J is inserted so as to provide that if an accountant or a merchant banker or a registered valuer, furnishes incorrect information in a report or certificate under any provisions of the Act or rules made there under, the Assessing Officer or the Commissioner (Appeals) may direct him to pay a sum by way of penalty of ten thousand rupees for each report or certificate by way of penalty.

No penalty shall be imposed if reasonable causes were there.

This section is applicable retrospectively w.e.f. 01/04/2017.

Restriction on set-off of loss under the head "House Property"

Section 71 of the Act relates to set off of loss from one head against income from another. In line with the international best practices and to collect revenue upfront, it is proposed to insert sub-section (3A) in the said section to provide that set-off of loss under the head "Income from House Property" against any other of income shall be restricted to two lakh rupees for any assessment year.

However, the unabsorbed loss shall be allowed to be carried forward for set off in subsequent years in accordance with the existing provisions of the Act.

Exemption u/s 10(38)

At present, the income arising from a transfer of long term capital asset, being listed equity share or unit of equity oriented mutual fund, is exempt from tax if transaction of sale is undertaken on or after 01/10/2014 and securities transaction tax (STT) is charged on the transaction.

The misuse of this section was noticed as certain unaccounted income was declared as exempt by entering into sham transactions. With a view to prevent this abuse, it is proposed to amend section 10(38) to provide that exemption under this section for income arising on transfer of equity share shall be available only if acquisition of share is chargeable to STT.

However this condition is not applicable in genuine cases like acquisition of shares in IPO, FPO, bonus or right issue by listed company etc.

Extending period for claiming deduction by start-ups

An eligible startup shall be allowed deduction @100% of profits and gains derived from eligible business for 3 consecutive assessment years out of 7 assessment years (instead of 5 assessment years as of now)

The amendment is made due to the fact that start-ups may take time to derive profit out of their business, and extending the option period will benefit them.

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