Tax Alert | Delivering Clarity - 25 March 2021 - Deloitte
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Tax Alert | Delivering Clarity
25 March 2021
Amendments to Finance Bill, 2021 as passed by Lok Sabha
Lok Sabha has passed the Finance Bill, 2021 on 23 March 2021 with certain amendments
Background:
The Finance Bill, 2021 (FB 2021) was presented by the Hon’ble Finance Minister (FM) on 1 February
2021. After considering different representations from various stakeholders, an amendment to the FB
2021 was placed before and passed by the Lok Sabha on 23 March 2021. The same has been cleared by
Rajya Sabha on 24 March 2021.
The FB 2021 as amended will become an Act after the President’s assent.
Key highlights of the amendments to the FB 2021 (FB 2021 amendments) in relation to Income-tax Act,
1961 (ITA) and Finance Act, 2016 (FA 2016), are as follows:
Corporate Tax
• Definition of written down value (WDV):
The definition of WDV under section 43(6)(c)(ii) of the ITA has been amended. WDV in case of block
of assets would now be further reduced by the actual cost of goodwill falling within that block as
follows:
In respect of the FY 2020-21, relevant to AY 2021-22, where goodwill of a business or profession was
part of block of assets on which depreciation was obtained by taxpayer in FY 2019-20, the amount of
WDV to be reduced by the actual cost of goodwill would be decreased by:
a. Actual amount of depreciation on such goodwill allowed before AY 1988-89;
b. Amount of depreciation allowable on such goodwill from AY 1988-89 onwards. as if goodwill was
the only asset in the relevant block
The reduction cannot exceed the WDV.
• Adjustment to book profits:
FB 2021 had proposed a provision under section 115JB of the (ITA) relating to computation of book
profits, to provide that a taxpayer could make an application to the Assessing Officer(AO) to
recompute the book profit and tax payable for past years in which any additional income has been
included in the books of account, due to conclusion of an Advance Pricing Agreement (APA) or a
secondary adjustment.
A new proviso has been introduced to clarify that the above-mentioned provision would be
applicable to AYs beginning on or before 1 April 2020 only if the taxpayer has not utilised the
©2021 Deloitte Touche Tohmatsu India LLPMinimum Alternate Tax (MAT) credit in any subsequent AY. Further, no interest shall be paid on any
refund arising out of recomputation of book profits.
Merger & acquisition
• Section 50B Slump sale:
The fair market value (FMV) of the capital assets as on the date of transfer (rules will be prescribed
for the manner of calculation of FMV) shall be deemed to be the full value of consideration received
or accruing as a result of such transfer. Further, for computing the net worth, the value of goodwill
which has not been purchased by the taxpayer will be considered as Nil.
• Deemed transfer on dissolution or reconstitution of specified entity:
A new deeming provision by way of section 9B of the ITA has been introduced to be deemed as
transfer, the receipt of any capital asset or stock-in-trade or both by a specified person [i.e. a partner
in a firm or a member of an Association of Persons (AOP) / Body of Individuals (BOI) (not being a
company or a co-operative society)] from a specified entity (i.e. firm or AOP or BOI) in connection
with dissolution or reconstitution of the specified entity.
The profits and gains on such deemed transfer will be deemed to be the income of the specified
entity in the year of receipt of the capital asset or stock-in-trade or both by the specified person and
would be taxed as capital gains or business income, as the case may be.
Further, fair market value of the capital asset or stock-in-trade or both on the date of its receipt by
the specified person will be deemed to be the full value of consideration.
The term ‘reconstitution’ for this purpose has also been defined. In brief, reconstitution of the
specified entity would mean where:
a. One or more partners or members of the specified entity cease to be partner or member; or
b. One or more new partners or members are admitted in the specified entity and one or more of
existing partners or members continue after the change; or
c. All the existing partners or members continue with a change in their respective share or in the
shares of some of them.
• Capital gains on reconstitution of specified entity:
Receipt of money or capital asset by a specified person [i.e. a partner in a firm or a member of an AOP /
BOI (not being a company or a co-operative society)] from a specified entity (i.e. a firm or an AOP or A
BOI) at the time of reconstitution of such specified entity shall be chargeable to tax under section 45(4)
of the ITA as capital gains in the hands of the specified entity. The profits and gains thereof will be
computed as follows:
©2021 Deloitte Touche Tohmatsu India LLPParticulars Formula
Value of money received by the specified person from specified
entity*
+ (i.e. add)
Income of
Fair market value of the capital asset received by the specified person
specified entity
from specified entity*
chargeable to
- (i.e. reduce)
tax as Capital
Gains** Capital account balance of the specified person in the specified entity
on the date reconstitution without giving effect to revaluation of
assets, self-generated goodwill or any other self-generated asset.
*On the date of receipt
**If the amount of capital gain is negative then it shall be deemed to be zero.
These provisions on reconstitution of specified entity shall apply in addition to the provisions
relating to deemed transfer under proposed under section 9B of the ITA.
Individual Taxation
• Interest on Contribution to Provident Fund (PF) / Recognised Provident Fund (RPF):
The threshold to tax interest accrued on employee’s contribution to PF / RPF referred to in section
10(11) and (12) of the ITA has been increased to INR 500,000 a year, provided no contribution is
made by the employer to such PF / RPF.
International Financial Services Centre (IFSC)
• Definition of specified fund:
The term “specified fund” eligible under section 10(4D) of the ITA [relating to exemption of income
arising as a result of transfer of qualifying capital asset] would now include:
─ Category I and Category II Alternative Investment Fund (AIF) regulated under the International
Financial Services Authority Act, 2019.
The same is in addition to Category I and Category II AIF regulated under the Securities and
Exchange Board of India Act, 1992 proposed in FB 2021.
─ Investment division of an offshore banking unit which has been granted a certificate of registration
as a Category I FPI under the Securities and Exchange Board of India (Foreign Portfolio Investor)
Regulations, 2019 made under the Securities and Exchange Board of India Act, 1992, and which has
commenced its operations on or before 31 March 2024.
The same will substitute investment division of an offshore banking unit which has been granted a
Category III AIF registration certificate, as proposed in FB 2021.
• Leasing of aircraft:
©2021 Deloitte Touche Tohmatsu India LLP─ The exemption under section 10(4F) of the ITA in addition to royalty, has been extended to interest
income of a non-resident on lease of aircraft in a previous year, paid by a qualifying unit of an IFSC.
The qualifying unit of an IFSC for this purpose would be as referred to in section 80LA of the ITA, if
such unit commences its operations on or before 31 March 2024.
─ Section 80LA of the ITA provides for deduction of 100% of income of a unit of an IFSC (for specified
period years) subject to certain conditions. Income eligible for such deduction would now include
income arising from the transfer of an aircraft which was leased by a qualifying unit of an IFSC to a
person subject to the condition that the unit has commenced operation on or before 31 March
2024.
Further, aircraft for these purposes would mean aircraft or a helicopter, or an engine of an aircraft or a
helicopter, or any part thereof.
• Relocation for foreign funds to an IFSC in India:
─ Section 10(23FF) was introduced by FB 2021 in the ITA to provide exemption on any income arising
on account of relocation of foreign funds to eligible fund located in an Indian IFSC.
The language of the said exemption provision has been substituted to include: any income of the
nature of capital gains, arising or received by a non-resident or a specified fund, on transfer of
share of a company resident in India, by the resultant fund or a specified fund to the extent
attributable to the units held by the non-resident (not being a permanent establishment of a non-
resident in India) in such manner as may be prescribed. Further, the said exemption shall be
available if:
a. Such shares were transferred from the original fund or from its wholly owned special purpose
vehicle to the resultant fund in relocation, and
b. Capital gains on such shares were not chargeable to tax if that relocation had not taken place.
─ The term for the purposes of the section 10(23FF) and 47 of the ITA would now mean transfer of
assets of the original fund or its wholly owned special purpose vehicle, to a resultant fund on or
before 31 March 2023, where consideration of such transfer is discharged in the form of share or
unit or interest in the resultant fund to:
i. Shareholder or unitholder or interest holder of the original fund, in the same proportion in
which the share or unit or interest was held by such shareholder or unitholder or interest
holder in such original fund, in lieu of their shares or units or interests in the original fund; or
ii. the original fund in the same proportion as in (i), in respect of which the share or unit or
interest is not issued by the resultant fund to its shareholder, unitholder or interest holder
─ Definition of resultant fund in section 47 of the ITA to now include funds which have been granted a
certificate of registration as a Category I or a Category II AIF regulated under the International
Financial Services Authority Act, 2019.
The same is in addition to Category I and Category II AIF regulated under the Securities and
Exchange Board of India Act, 1992 proposed in FB 2021.
©2021 Deloitte Touche Tohmatsu India LLP• Tax on income from Global Depository Receipts (GDR) purchased in foreign currency or capital gains
arising from their transfer
Section 115ACA of the ITA provides for tax on dividend and long-term capital gains from qualifying GDR
purchased in foreign currency, at concessional rates subject to certain conditions.
Definition of GDR for the purpose of this section has been amended to include such GDR issued by an
Overseas Depository Bank located in an IFSC (in addition to Overseas Depository Bank located outside
India). Further, the same can now be also issued against the ordinary shares of the issuing company
incorporated outside India, if such GDR or certificate is listed and traded in any qualifying IFSC.
• Tax on income of Foreign Institutional Investors (FII) from securities or capital gains arising from
their transfer
Section 115AD of the ITA provides for tax on income of FII from securities or capital gains arising from
their transfer at specified rates.
Provisions of section 115AD to now apply to income that is attributable to the investment division of an
offshore banking unit, as a qualifying Category I FPI under the Securities and Exchange Board of India
(Foreign Portfolio Investor) Regulations, 2019 made under the Securities and Exchange Board of India
Act, 1992.
The same will substitute investment division of an offshore banking unit, a qualifying Category III AIF
registration certificate, as proposed in FB 2021.
• Definition of Investment Fund:
Definition of investment fund under section 115UB of ITA (relating to tax on investment fund and its
unit holders) has been amended to include funds which have been granted a certificate of registration
as a Category I or a Category II AIF regulated under the International Financial Services Authority Act,
2019.
The same is in addition to Category I and Category II AIF regulated under the Securities and
Exchange Board of India Act, 1992 proposed in FB 2021.
Others
• Incentive for investment by sovereign wealth fund, pension fund, etc.
The eligible criteria for investment by Category I or Category II AIF in one or more company having
fifty per cent or more investment in one or more eligible companies has been extended to:
─ Domestic company set-up and registered after 1 April 2021 with at least 75% investment in one or
more infrastructure companies, subject to conditions;
─ Non-Banking Financial Companies (registered as Infrastructure Finance Company / Infrastructure
Debt Fund), having minimum 90% lending to infrastructure entities (subject to conditions).
• Definition of the expression ‘Liable to tax’:
©2021 Deloitte Touche Tohmatsu India LLPThe definition of term ‘Liable to tax’ under section 2(29A) 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.
• Audit of accounts of certain persons:
Payment or receipt of cheque / bank draft which is not account payee, will be deemed to be
payment or receipt in cash for the purposes, for then the same will be deemed to be receipt of cash
for the purposes of determining the threshold of the requirement to get accounts audited under
section 44AB of the ITA.
• Reassessment / re-opening proceedings:
FB 2021 had revamped the entire process of reassessment proceedings by reducing the timeline to
re-open the audit proceedings to three years; 10 years in cases where AO, based on possession of
books of account or other documents or evidence revealing that income represented in the form of
asset, has escaped assessment of INR 5 million or more.
It has been clarified by FB 2021 amendments that assets under section 149 of the ITA shall include
immovable property being land or building or both, shares and securities, loans and advances,
deposits in bank account.
• Taxation of for interest income of Foreign Portfolio Investors (FPI):
The proviso to section 115AD of the ITA which subjects FPI to concessional tax rate of 5% (in respect of
interest income referred to in section 194LD of the ITA), has been reinstated.
Equalisation Levy:
• FB 2021 amendments has now amended the expression ‘consideration received or receivable from
e-commerce supply or services’ so as to exclude from its ambit the consideration for:
─ Sale of goods which are owned by / provision of services by a person resident in India;
─ Sale of goods which are owned by / provision of services by a permanent establishment (PE) of a
non-resent in India and if such sale of goods / provision of services is effectively connected with
such PE.
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