The Finance Bill 2021 introduced vide Union Budget 2021-22 was recently approved by the President on March 28, 2021, with certain amendments.
Basis our review of the proposals introduced vide Finance Bill 2021 and feedback received from our members, NASSCOM had submitted a detailed post budget memorandum to Ministry of Finance (MoF) highlighting concerns and recommendations to strengthen the Budget proposals. The document can be accessed from the link: https://community.nasscom.in/communities/policy-advocacy/post-budget-memorandum-2021-22.html
While, some of the recommendations have been accepted, we will continue to work with MoF to get clarity on the other aspects highlighted in our Post Budget Memorandum.
The key relevant amendments approved in Finance Bill 2021 are summarised below:
A. AMENDMENTS W.R.T EQUALISATION LEVY (EL)
As per Finance Bill 2021: It was earlier proposed that EL will apply on consideration received by non-resident E-commerce Operator (ECO) irrespective of whether goods or services are owned, provided, or facilitated by ECO.
As per amendment to Finance Bill, 2021: It has now been proposed that “consideration received from ecommerce supply or services” will exclude consideration for sale of goods/ provisions of services which are:
- Owned/ provided by a person resident in India
- by a Permanent Establishment (PE) in India of non-resident, if such sale of goods/provision of service is effectively connected with such PE
Implication: This proposal is likely to result in a change in the tax base on which EL is applied. EL should not apply on the consideration in cases where there are Indian merchants listing their goods on foreign marketplace which may be bought by Indian customers. This proposal addresses an important suggestion made by the Industry and is in line with NASSCOM’s recommendation to MoF.
B. DEFINITION OF "LIABLE TO TAX" REPHRASED
As per Finance Bill, 2021: It was earlier proposed to insert the definition of “liable to tax” to mean a liability of tax on such person under any law for the time being in force in any country and shall include a case where subsequent to imposition of tax liability, an exemption has been provided.
As per amendment to Finance Bill, 2021: The definition proposed by the Finance Bill, 2021 does not specify the nature of tax which shall be considered for this purpose. In absence of specific reference to ‘Income-tax’, it could be concluded that if a person is paying any tax he may be regarded as liable to tax in such country. To remove this ambiguity, the following definition of this term is now proposed:
“Liable to tax”, in relation to a person and with reference to a country, means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country.
Implications: These amendments now bring in more clarity to the definition of the term “liable to tax” and is in alignment with generally accepted international tax principles. However, there are still aspects which need further clarity.
While it is specifically provided now that liability to tax should be seen with respect to income-tax liability and not generally under any other law of concerned country; it is consequently clear that if a foreign country does not impose an income tax, then residents of that country may not be eligible if such treaty uses the ‘liable to tax’ language. It is also likely that persons whose income is effectively subject to tax in home country such as fiscally transparent entities shall be excluded from this definition.
C. GOODWILL FORMING PART OF EXISTING BLOCK OF ASSETS TO BE REDUCED FROM WRITTEN DOWN VALUE (WDV)
As per Finance Bill 2021: Finance Bill 2021 had proposed to exclude goodwill of a business/ profession from the definition of “block of assets” and also to amend S. 32(1) of Income Tax Act, 1961 (IT Act) w.e.f. April 1, 2020 to exclude ‘goodwill’ as a depreciable intangible asset. The Finance Bill 2021 did not propose any amendment to S. 43 which defines WDV of the block of assets. Thus, there was ambiguity as to how these provisions will be implemented.
As per amendment to Finance Bill, 2021: In order to clarify implementation of the above proposal, necessary amendments have been introduced to S.43(6)(c) to provide that WDV of goodwill will be excluded from the WDV of block of assets.
Implications – The Finance Bill 2021 has sought to undo an issue that was allowed in favour of taxpayers by the Courts by allowing depreciation on goodwill. The recently announced amendments on goodwill accounting are primarily clarificatory in nature and will help in avoiding any controversy or potential litigation that may arise due to the changes proposed through Finance Bill 2021.
D. SLUMP SALE TO BE TAXED AT FAIR MARKET VALUE OF CAPITAL ASSETS TRANSFERRED, TO BE CALCULATED IN PRESCRIBED MANNER
As per Finance Bill 2021: As slump sale is defined to mean sale of undertaking for a lump sum consideration, some courts have taken a view that transfer by way of exchange, relinquishment etc. shall not be considered as slump sale and only sale for monetary consideration would be covered. To provide clarity on this issue, S. 2(42C) was proposed to be amended to provide that all types of ‘transfer’ as defined under S.2(47) shall be included within the scope of slump sale. However, the Finance Bill, 2021 had not proposed any amendments to section 50B which provides that where an undertaking or division is acquired, the net worth of such undertaking or division is deemed as the cost of acquisition.
As per amendment to Finance Bill, 2021: S. 50B(2) is now proposed to be amended to provide that the Fair Market Value (FMV) of the capital assets (being an undertaking or division transferred by way of slump sale) as on the date of transfer shall be calculated in the prescribed manner. Such FMV shall be deemed to be full value of the consideration received or accruing as a result of transfer of such capital asset.
Further, a new clause in Explanation 2 has been inserted to provide that the value of capital asset being self-generated goodwill, i.e., goodwill that has not been acquired by the assessee by purchase from a previous owner, shall be taken as nil while computing net worth.
Implications: Earlier, income-tax provisions in connection with slump sale did not prescribe any specific value to be considered as the full value of consideration or any valuation mechanism to calculate capital gains arising from a slump sale under S.50B. Resultantly, slump sales have been undertaken at values determined by the parties involved. However, after this amendment, it will be necessary to transfer the undertaking at the prescribed FMV to be determined based on the valuation mechanism prescribed by the Indian Government.
Where actual consideration is less than the FMV determined in the prescribed manner, the FMV would be deemed to be the consideration for purposes of computing capital gains tax under S. 50B and it would result in higher capital gain tax liability in the hands of seller. If the buyer pays consideration greater than the net worth, the buyer may need to recognise this excess amount as goodwill in his books of accounts, which is not a depreciable asset, going forward. This could result in sunk loss for the buyer.
E. FEE FOR DEFAULT IN FURNISHING RETURN OF INCOME
S. 234F provides for levy of late fee when a person fails to furnish return of income by the due date prescribed under s. 139(1). The late fee is levied as follows:
For total income up to INR 500,000 - Filing return after due date - INR 1,000
For total income above INR 500,000 - Filing return after due date but on or before December 31 of the relevant Assessment Year - INR 5,000
For total income above INR 500,000 - Filing return after due date but between January 1 and March 31 of the relevant Assessment Year - INR 10,000
As per Finance Bill, 2021: It was proposed to reduce the time-limit to file belated or revised returns of income, as the case may be, by 3 months. Therefore, the last date to file the revised or belated return shall be 31st December of the relevant Assessment Year. As the last date cannot exceed 31st December, the higher late filing fees of Rs. 10,000 cannot be levied in any situation.
As per amendment to Finance Bill, 2021: A consequential amendment has been proposed to S. 234F to provide that the late-filing fee shall not exceed INR 5,000.
Implications: This will align penalty provisions with the return filing date.
We hope you will find the update useful.
