[Analysis] Changes Proposed in the Income-tax Act by the Finance Bill 2024

Table of Contents

1. TCS provisions proposed to be amended to align them with the Govt.’s Press Release
2. Extension of sunset dates under various provisions
3. Withdrawal of small outstanding direct tax demands

Finance Minister Nirmala Sitharaman presented the Interim Budget for 2024-25 in the Parliament on February 01, 2024. The emphasis of the 2024 Interim Budget was on empowering youth and women, developing infrastructure, supporting agriculture, promoting green growth, and enhancing the railway sector.

No significant tax announcements were proposed, with only a few necessary proposals introduced concerning Income Tax and GST. The changes proposed in the Finance Bill 2024 have been discussed below:

1. TCS provisions proposed to be amended to align them with the Govt.’s Press Release

1.1 Background

Section 206C requires the collection of tax by the seller from certain transactions like the sale of alcohol, liquor, forest produce, scrap, and so forth. Sub-section (1G) of Section 206C requires tax collection on foreign remittances made under the Liberalised Remittance Scheme (LRS) and on the sale of Overseas Tour Program Packages (OTPP).

The Finance Act 2023 has brought substantial changes in the provisions related to the collection of tax at source under section 206C(1G). The Finance Act 2023 amended the provisions of Section 206C(1G) as follows (effective from July 01, 2023):

• The threshold limit of Rs. 7 lakhs in respect of remittance under LRS was removed;
• TCS rate in respect of remittance under LRS and on the sale of OTPP was increased from 5% to 20%;
• 5% TCS to apply if remittance is for education or medical treatment [second proviso to Section 206C(1G)]; and
• The tax was to be collected when the remittance was for education or medical treatment and the aggregate of remittance exceeds Rs. 7 lakhs [second proviso to Section 206C(1G)].

In response to the comments and suggestions submitted by the stakeholders, the government decided to make changes to the TCS provisions. The Govt. has issued a press release dated 28-6-2023, announcing several changes to Section 206C(1G). The following changes were announced in the TCS provisions:

• The threshold of Rs. 7 lakhs per financial was restored for TCS on all categories of LRS payments, regardless of the purpose. Thus, there shall be no TCS for the first Rs. 7 Lakh remittance under LRS. Beyond the threshold, TCS shall be
  1. 5% (if remittance is made for the education and it is financed by an education loan);
  2. 5% (in case of remittance for education/medical treatment);
  3. 20% for others.
• For purchasing an overseas tour program package, the TCS shall apply at 5% for the first Rs. 7 lakhs per individual per annum; the 20% rate will only apply for expenditures above this limit.
• The increase in TCS rates, which were to take effect from July 01, 2023, shall come into effect from October 01, 2023, with the abovementioned modification.

1.2 Amendments proposed by the Finance Bill 2024

To implement the changes introduced by the Press Release, the Finance Bill proposes the necessary amendments to Section 206C(1G). The TCS rates from the remittances made under the LRS, after incorporating the proposed amendments, shall be as follows:

1.3 Insertion of the fifth proviso

The Finance Bill 2024 proposes to insert the fifth proviso to validate the collection of tax under Section 206C(1G) in accordance with the unamended provisions announced by the press release, dated 28-06-2023. The fifth proviso provides that collection of tax at source during the period 01-07-2023 to 30-09-2023 shall be in accordance with provisions of Section 206C(1G) as they stood on 01-04-2023.

2. Extension of sunset dates under various provisions

The Finance Bill 2024 proposes to extend the sunset date for several provisions under the Income-tax Act. The date under the following provisions is proposed to be extended from 2024 to 2025:

2.1 Exemption to specified fund [Section 10(4D)]

Section 10(4D) provides an exemption to the specified funds with respect to certain specified income. Such exemption will be granted only with respect to income which is attributable to units held by a non-resident (not being a PE in India) or is attributable to the investment division of an offshore banking unit, as the case may be.

The exemption under Section 10(4D) is also allowed to the Investment division of the offshore banking unit. An investment division of an offshore banking unit shall be treated as a specified fund and eligible for exemption under this provision if it satisfies certain conditions. One of the conditions is that its operations must be commenced on or before 31-03-2024.

This date to commence operations is proposed to be extended from 31-03-2024 to 31-03-2025. Consequently, the specified income of the Investment division of an offshore banking unit will remain exempt if it initiates operations on or before 31-03-2025.

2.2 Exemption to royalty or interest income received by a non-resident from lease of aircraft or a ship [Section 10(4F)]

Any income of a non-resident by way of royalty or interest on account of leasing of an aircraft or a ship in a previous year to a unit of an International Financial Services Centre as referred to in Section 80LA(1A) shall be exempt from tax provided such unit has commenced its operations on or before 31-03-2024.

This date of commencement of operations is proposed to be extended from 31-03-2024 to 31-03-2025.

2.3 Exemption to the wholly owned subsidiary of ADIA or Sovereign wealth fund or pension fund [Section 10(23FE)]

Income in the nature of dividend, interest or long-term capital gains of a wholly owned subsidiary of the Abu Dhabi Investment Authority, a sovereign wealth fund, or a pension fund shall be exempt from tax. The exemption is allowed on fulfilment of certain conditions.

The exemption under this provision shall be available if the investment is made between 01-04-2020 and 31-03-2024 in the specified entities. The Finance Bill 2024 proposes an extension of the deadline for making investments from 31-03-2024 to 31-03-2025.

2.4 Extension in the outer date for the incorporation of start-up [Section 80-IAC]

An eligible start-up (company or LLP) can claim a deduction under Section 80-IAC for the profit and gains arising from eligible business. The deduction can be claimed up to 100% of the profits and gains derived in 3 consecutive years out of the 10 assessment years beginning from the year of incorporation.

One of the conditions to claim deduction under this provision is that an eligible entity is incorporated on or after 01-04-2016 but before 01-04-2024. This outer date for the incorporation of a start-up company or LLP is proposed to be extended from 2024 to 2025. Consequently, the deduction under Section 80-IAC will remain available to a start-up if incorporated on or before 31-03-2025.

2.5 Deduction to Off-shore Banking Units and IFSC [Section 80LA]

A Schedule Bank, a foreign Bank or a unit of IFSC is eligible to claim a deduction under Section 80LA. In the case of a bank, 100% of the income is deductible for 10 consecutive assessment years. In the case of a unit of an IFSC, 100% of income is deductible for 10 consecutive assessment years out of 15 years.

The deduction is allowed for the income arising from the transfer of an asset, being an aircraft or a ship, which was leased by a unit of the IFSC from its business for which it has been approved for setting up at such a centre in an SEZ. However, the deduction in respect of this income shall be allowed if the unit has commenced operation on or before 31-03-2024. It has been proposed that this date to commence operations be extended from 31-03-2024 to 31-03-2025. Consequently, the deduction can be claimed even if the unit has commenced operations on or before 31-03-2025.

2.6 Extension in the time limit to issue directions by CBDT for implementing faceless regime [Section 92CA, Section 144C, Section 253 and Section 255]

The Central Government has undertaken several measures to make the proceedings under the Act electronic by eliminating the personal interface between the taxpayer and the department to the extent technologically feasible and providing for optimal utilisation of resources and a team-based assessment with dynamic jurisdiction.

As part of this process of making the tax administration transparent and efficient, enabling provisions to notify faceless schemes under Sections 92CA, 144C, 253 and 255 in line with the faceless assessment and faceless appeal schemes, were introduced through the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 with effect from 01-11-2020 and the Finance Act 2021 w.e.f. 01-04-2021.

To implement the faceless regime in the above-mentioned provisions, it was provided that the CBDT will issue directions in the following manner:

The Finance Bill 2024 has proposed to amend the above provisions to extend the date for issuing directions for Sections 92CA, 144C, 253 and 255 from 31-03-2024 to 31-03-2025.

3. Withdrawal of small outstanding direct tax demands

The finance minister, in her budget speech, has proposed the withdrawal or waiver of small, unresolved, unverified, or disputed direct tax demands related to financial years up to 2014-15. This initiative aims to address concerns related to demands amounting to Rs. 25,000 for the period up to financial year 2009-10 and Rs. 10,000 for financial years 2010-11 to 2014-15.

In Paragraph 93 of her Interim Budget Speech, the finance minister highlighted the government’s commitment to enhancing ease of living and doing business. She emphasized the need to improve taxpayer services by addressing numerous small, unresolved, unverified, or disputed direct tax demands, some dating back to 1962. The proposal intends to withdraw such demands up to Rs. 25,000 for the period up to financial year 2009-10 and up to Rs. 10,000 for financial years 2010-11 to 2014-15. This move is expected to benefit around one crore taxpayers.

The announcement significantly reduces taxpayer anxiety and the workload of the income-tax department’s tax-collecting machinery and appellate forums. Importantly, this proposal covers income-tax demands and demands related to wealth tax, gift tax, estate duty, and banking cash transaction tax.