SKP Tax Alert
Volume 9 Issue 3 | 9 May 2016
Key amendments to the Finance Bill, 2016 passed by Lok Sabha
The Finance Bill presented in the Lok Sabha was passed on 5 May 2016 with 46 amendments made to the Bill. Some of the key changes are:
  1. The period of holding unlisted shares has been reduced from 36 months to 24 months in order to qualify as long-term capital assets.
  2. Proposal to tax withdrawals from provident fund contributions is done away with. Furthermore, with respect to the taxability of the employers’ contribution exceeding 12% of the salary, to the recognised provident fund was capped at under INR 150,000 or over 12%.The ceiling limit of INR 150,000 is removed.
  3. Fair market value (FMV) declared of any capital asset as per Income Declaration Scheme, 2016 shall be treated as its cost of acquisition provided tax, surcharge and penalty have been paid on the FMV of the asset as on the date of commencement of this scheme.
  4. Tax incentives for start-ups have been extended to Limited Liability Partnerships (LLP), apart from Companies. LLPs will also be required to be engaged in eligible business involving innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.  The taxpayer should hold a certificate of eligible business from the Inter-Ministerial Board of Certification notified by the central government.
  5. Exemption from tax on long-term capital gains on the transfer of shares undertaken in foreign currency on recognised a stock exchange located in an International Financial Service Centre (IFSC) was proposed. It has been further clarified that short-term capital gains arising from the transfer of such shares through a recognised stock exchange located in an IFSC shall be taxable at 15% even if STT is not paid.
  6. The benefit of a lower corporate tax rate of 25% was given to manufacturing companies set up on or after 1 March 2016. Further change made while passing the bill now suggests that the lower rate of 25% shall be applicable if, “the company is not engaged in any business other than the business of manufacture or production of article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it”. On reading the amendment, it appears that the benefit of the lower rate would be available to:
    • a company engaged in the business of manufacturing an article or thing and carrying out research for the same or;
    • a company involved in the manufacturing and distribution of an article or thing manufactured by it;

      Furthermore, it has also been added that option must in on or before the statutory due date of filing the first tax return. Once an option to avail the benefit , it cannot be subsequently withdrawn.
  7. It was proposed to levy tax at the rate of 10% on dividend income earned in excess of INR 1 million in case of individual, HUF or firm who is a resident in India on a gross basis. It was clarified that such tax shall be payable only on the amount of dividend exceeding INR 1 million. Hence, it suggests that the tax exemption on dividend income continues up to INR 1 million for all.
    Further, it was also clarified that the limit of INR 1 million is for dividends received from all domestic companies taken together.
  8. The Patent Box tax regime for the taxation of royalty earned in respect of patents developed and registered in India at the concessional rate of 10% (plus applicable surcharge and cess) on a gross basis, subject to the fulfilment of prescribed conditions, was also introduced. In addition, the following amendments were made to the said regime: 
    • The taxpayer can exercise the option of availing the concessional tax regime in the manner prescribed or before the statutory due date of filing the tax return.
    • It appears that once the option is availed by the taxpayer and in case the conditions of the regime are not fulfilled or if the taxpayer opts out of the regime in any of the subsequent five years, then the option to avail the concessional tax regime shall not be available for the subsequent five years, to the year in which he opts out/does not satisfy the conditions.
    • To avail of the concessional tax regime, at least 75% of the expenditure for patent developments should be incurred in India.
  9. In cases of distribution to investors by Alternative Investment Funds (AIFs), it was proposed in the Finance Bill 2016, that where the unit holder is a non-resident, the withholding tax shall be lower of  10% or as per the rate provided under the relevant Double Taxation Avoidance Agreement (DTAA).  It has now been further clarified that for non-residents, withholding tax would not be applied if the income is not chargeable to tax. 
  10. The time limit of one year for processing tax returns under the summary assessment is an extended (at option of the tax officer), in cases selected for scrutiny.
  11. Earlier according to the Finance Bill, 2016, it was proposed that every seller of a motor vehicle shall collect TCS at the rate of 1% of the value of the motor car,  if such a value exceeds INR 1 million at the time of debiting the amount receivable or, at the time of receipt whichever is earlier. It has now been amended that such tax shall be collected only at the time of receipt of consideration.
  12. Penalty provisions are extended to cover the increase in deemed total income under Minimum Alternate Tax provisions or Alternate Minimum Tax provisions (MAT/AMT) due to assessment or reassessment as part of under-reporting of income.
    If the tax return is not filed and income is assessed for the first time, the tax payable on account of such income shall not be given the benefit of basic tax exemption limit. Also, the for computing of tax payable in other cases of income is prescribed.
  13. An exit tax was proposed to be levied on registered charitable institutions in some cases. New provisions have been  to exclude certain assets, which do not form a part of the accreted income. Also, the new time limit for the payment of tax has been prescribed for the payment of tax on accreted income.

Amendments proposed are steps towards further clarifying the proposals of the Finance Bill, 2016. It is awaited whether any further modifications are proposed before the Bill receives further assent from the President.

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