Comparative Analysis of Amendments in Finance (No. 2) Act 2024 | Key Changes to the Income Tax Act
- Blog|Advisory|Income Tax|
- 7 Min Read
- By Taxmann
- |
- Last Updated on 25 August, 2024
Latest from Taxmann
This article provides a comparative analysis of the recommendations presented in Taxmann’s Union Budget 2024: 75 Recommendations and Expectations and the amendments made in the Finance (No. 2) Act 2024. The key updates include changes to buyback taxation, streamlined tax frameworks for charitable trusts, increased interest rates for TCS defaults, and expanded eligibility for lower tax collection certificates. The analysis highlights the legislative response and the alignment between lawmakers and the tax community.
Taxpayers, tax professionals, and tax authorities share the collective responsibility to ensure that tax laws are clear, straightforward, and equitable. We position ourselves as a pivotal link among these groups. Through detailed research and surveys, we gather recommendations aimed at resolving discrepancies, addressing disputes, enhancing clarity, and catering to taxpayers’ needs. Annually, we present these suggestions to the legislature to aid in refining tax regulations.
This year, we proposed 75 amendments to the government, which we anticipated would be included in the Finance (No. 2) Bill 2024, now enacted as the Finance (No. 2) Act 2024. These proposals were detailed in our publication, “Union Budget 2024: 75 Recommendations and Expectations” | [2024] 164 taxmann.com 159″.
A comparative analysis has shown a moderate legislative response, indicating an increased willingness for dialogue between lawmakers and the tax community. Of our proposals, six were adopted by the legislature. This article provides a comparative analysis of our recommendations versus the amendments made in the Finance (No. 2) Act 2024, specifically concerning changes to the Income Tax Act, 1961.
| S. No. | Expectations/Recommendations | Amendments made by the Finance (No. 2) Act 2024 |
|
Abolition of Buy Back Taxes |
||
| 1. | One significant challenge is the tax burden incurred by companies during the buyback process. Currently, domestic companies are liable to pay a 20% tax on distributed profits (plus a 12% surcharge and a 4% cess), leading to an effective rate of 23.296%. This tax responsibility on companies reduces profitability and diminishes shareholder returns. To address this issue, the SEBI has proposed shifting the tax liability from the company to the shareholders during the buyback process.
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. |
The Finance (No. 2) Act 2024 specifies that payments made by domestic companies to buy back shares will be considered dividends in the hands of the shareholders and taxed at the applicable rates. Moreover, no deductions for expenses under Section 57 will be permitted against this dividend income when determining income from other sources. Additionally, the cost of acquisition of the shares bought back will be considered a capital loss under Section 46A, as these shares are extinguished. Consequently, shareholders who realize capital gains from the sale of other shares or assets can offset these gains with the original cost of the shares that were bought back. Changes have also been made to Sections 115QA and 10(34A) to support these updates. |
|
Streamlined Taxation Framework for Charitable Trusts |
||
| 2. | Charitable trusts and institutions currently have the option to claim tax exemptions under one of two regimes:
(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. |
The Finance (No. 2) Act 2024 has introduced measures to phase out the first regime specified under sub-clause(s) (iv), (v), (vi), or (via) of Section 10(23C), transitioning trusts, funds, or institutions to the second regime governed by Sections 11 to 13. This transition will be implemented gradually:
(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 |
||
| 3. | Section 201 of the Income Tax Act outlines the repercussions for failing to deduct or pay the tax deducted at source (TDS). According to this provision, if there is a failure to deduct tax, the deductor is liable to pay interest at a rate of 1% per month or part of the month. Conversely, if tax has been deducted but not deposited, the interest rate increases to 1.5% for every month or part of the month.
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. |
The Finance (No. 2) Act 2024 has amended sub-section (7) of section 206C. The amendment specifies that the interest rate for failing to deposit the collected TCS to the government account will increase from 1% to 1.5% per month or part thereof, calculated from the date the tax was collected until the date it is actually paid. This change ensures a consistent approach to penalizing non-compliance across different tax collection mechanisms. |
|
Inclusion of Foreign Tax Deductions in Assessee’s Income |
||
| 4. | Section 198 of the Income-tax Act, 1961, mandates that tax deducted at source (TDS) under this chapter should be included in the gross total income of the assessee. This section falls under Chapter XVII, which encompasses the deduction and collection of taxes from Sections 192 to 206C. Consequently, any tax deducted or collected under these sections of the Income-tax Act is considered part of the assessee’s income and is added to their gross total 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. |
The Finance (No. 2) Act 2024 has amended Section 198 to stipulate that all sums deducted in accordance with Chapter XVII-B and taxes paid outside India by way of deduction, for which an assessee is allowed a credit against their tax payable under the Act, are deemed to be income received for the purpose of computing the income of the assessee.
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 |
||
| 5. | Sections 201 and 206C of the Income-tax Act outline the repercussions for failure to deduct, collect, or remit the required tax amounts under the Act. Currently, under sub-section (3) of section 201, there exists a seven-year limit within which an order can be issued under sub-section (1) of section 201, designating a person as an assessee in default for not deducting or remitting tax, where the payee is a resident in India. Notably, there has been no corresponding time limit specified for cases involving non-residents, leading to uncertainties for non-resident payees.
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. |
The Finance (No. 2) Bill 2024 has made a crucial amendment to Section 201(3). The amendment replaces “a person resident in India” with “any person,” thereby extending the specified seven-year time limit for passing an order to both resident and non-resident cases. This change ensures uniform application of the law and reduces the legal uncertainty previously faced by non-residents involved in tax deduction proceedings. |
|
Expanding Eligibility for Lower Tax Collection Certificate |
||
| 6. | Under the current provisions of Section 206C(9) of the Income-tax Act, an assessee has the ability to request from the Assessing Officer a certificate allowing the collection of tax at reduced rates. This certificate is granted when the assessee’s existing and projected tax liabilities justify a lower rate of tax collection. However, this privilege is presently limited to persons specified under sub-sections (1) and (1C) of section 206.
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. |
In an effort to simplify the process of doing business and to decrease the compliance burden on taxpayers, an amendment has been made to sub-section (9) of Section 206C. This modification includes sub-section (1H) of Section 206C within its scope, thereby allowing those involved in the sale of goods to apply for a certificate for lower tax deductions.
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. |
Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.
Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.
The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:
- The statutory material is obtained only from the authorized and reliable sources
- All the latest developments in the judicial and legislative fields are covered
- Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
- Every content published by Taxmann is complete, accurate and lucid
- All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
- The golden rules of grammar, style and consistency are thoroughly followed
- Font and size that’s easy to read and remain consistent across all imprint and digital publications are applied
Sign Up
To subscribe to our weekly newsletter please log in/register on Taxmann.com
Latest Books
Everything on Tax and Corporate Laws of India
To subscribe to our weekly newsletter please log in/register on Taxmann.com
