Comparative Analysis of Amendments in Finance (No. 2) Act 2024 | Key Changes to the Income Tax Act

Abolition of Buy Back Taxes

This proposed change aims to make the tax treatment of buybacks fairer and more equitable. Under the new system, shareholders of unlisted companies would benefit from indexation when calculating capital gains taxes, while shareholders of listed companies would enjoy reduced tax rates on long-term holdings—halved from the current rate applicable to buybacks. Additionally, shareholders would be able to claim losses if the buyback price is lower than the issue price, a provision not currently allowed.

Streamlined Taxation Framework for Charitable Trusts

(a) Institutions approved by the Principal Commissioner or Commissioner of Income-tax (“PCIT / CIT”) under Section 10(23C); and

(b) Trusts registered under Section 12AA/12AB.

In recent years, numerous amendments have been aimed at harmonizing the taxation provisions for charitable and religious trusts. These amendments have reduced many of the differences between the two regimes and addressed several issues. To further simplify the tax landscape, we have recommended eliminating these disparities and merging the approval-based exemption under Section 10(23C) with the tax framework under Sections 11 to 13.

(a) Applications for approval or provisional approval under the first regime filed on or after 1st October 2024 will no longer be considered.

(b) Applications submitted under these sub-clauses before 1st October 2024 that are still pending will be processed according to the existing rules of the first regime.

(c) Trusts, funds, or institutions that have already received approval will continue to enjoy exemption benefits until the expiration of their current approval.

(d) After the current approval expires, these entities will be eligible to apply for registration under the second regime.

This legislative update ensures a streamlined and simplified tax framework that facilitates easier management and compliance for charitable trusts and institutions.

Increased Interest Rate for Non-Deposit of TCS Amount

In comparison, Section 206C, which deals with the Tax Collected at Source (TCS), previously prescribed a uniform interest rate of 1% per month or part thereof, irrespective of whether the tax was not collected or, once collected, was not deposited with the government.

It was anticipated that the government might seek to harmonize the penalty provisions for both TDS and TCS defaults by modifying Section 206C to introduce a higher interest rate for cases where tax is collected but not deposited to the credit of the Central Government.

Inclusion of Foreign Tax Deductions in Assessee’s Income

However, challenges arise in the computation of income when taxes are withheld outside India, and the corresponding income is subject to tax in India. Currently, in the absence of a specific provision, assessees include only the net income (i.e., the amount remitted to India after withholding of taxes) in their gross total income, whereas Assessing Officers tend to assess the gross amount. This discrepancy stems from the lack of mention in Section 198 regarding taxes withheld outside India. Although Section 198 establishes a deeming provision for taxes deducted or collected under the Income-tax Act, it does not cover taxes withheld abroad.

Given that taxes paid outside India qualify for the foreign tax credit under Section 90/90A in conjunction with Rule 128, there was an anticipation that amendments might be made to Section 198 to align the treatment of income earned abroad with that earned within India.

This amendment will be effective from April 1, 2025, ensuring a more uniform approach to the inclusion of foreign tax deductions in the computation of an assessee’s income.

Specifying Time Limit for Tax Deduction Defaults on Payments to Non-Residents

To resolve this discrepancy and bring clarity, it was suggested that the Government amend sub-section (3) of section 201 to introduce a specific time limit for declaring a person as an assessee in default in situations involving tax deduction or deposit defaults on payments made to non-residents.

Expanding Eligibility for Lower Tax Collection Certificate

Currently, assessees falling under sub-sections (1F) (pertaining to the sale of motor vehicles), (1G) (involving remittances of foreign currency under the Liberalised Remittance Scheme or sales of overseas tour packages), and (1H) (concerning the sale of goods) are excluded from applying for these lower tax collection certificates.

To promote fairness and consistency in the application of tax laws, it is proposed that the ability to apply for a certificate for lower tax collection should be extended to include individuals and entities covered under sub-sections (1F), (1G), and (1H) of Section 206C. This expansion would ensure that all relevant parties have the opportunity to benefit from potentially reduced tax obligations based on their specific circumstances.

This amendment will become effective from October 1, 2024, ensuring that businesses have the necessary provisions to manage their tax deductions more effectively and with greater flexibility.