Finance Bill, 2014-Overview of changes in Direct taxes



 Finance Bill, 2014-Overview of changes in Direct taxes
Finance Bill, 2014-Overview of changes in Direct taxes
Rates of Income-tax
Additional Resource Mobilisation Measures
Measures to Promote Socio-economic Growth
Relief and Welfare Measures
Widening of Tax Base and Anti Tax Avoidance Measures
Rationalisation Measures
1.Rates of income-tax in respect of income liable to tax for the assessment year 2014-2015
Same as those laid down in Part III of the First Schedule to the Finance Act, 2013, for the purposes of computation of “advance tax”, deduction of tax at source from “Salaries” and charging of tax payable in certain cases
2.Rates for deduction of income-tax at source during the financial year 2014-2015 from certain incomes other than“Salaries”.
Specified in Part II of the First Schedule to the Bill(The rates for all the categories of persons will remain the same as those specified in Part II of the First Schedule to the Finance Act, 2013, for the purposes of deduction of income-tax at source during the financial year 2013-2014)
3. Rates for deduction of income-tax at source from “Salaries”, computation of “advance tax” and charging of
Income-tax in special cases during the financial year 2014-2015.
The rates for deduction of income-tax at source from “Salaries” during the financial year 2014-2015 and also for computation of “advance tax” payable during the said year in the case of all categories of assessees have been specified in Part III of the First Schedule to the Bill.
The salient features of the rates specified in the said Part III——-Refer Appendix 1
4.Dividend and Income Distribution Tax
Section 115-O :For the purposes of determining the tax on distributed profits payable in accordance with the section 115-O, any amount by way of dividends referred to in sub-section (1) of the said section, as reduced by the amount referred to in sub-section (1A) [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits.
Section 115-R: For the purposes of determining the additional income-tax payable in accordance with sub-section (2) of the said section, the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual Fund.
w.e.f.1st October, 2014.
5.Long-term Capital Gains on debt oriented Mutual Fund and its qualification as Short-term capital asset
Amendment in section clause (42A) of section 2 so as to provide that an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short-term capital asset if it is held for not more than thirty-six months.
w.e.f. 1st April, 2015
6.Tax on long-term capital gains on units
Section 112: Amendment in the provisions of section 112 so as to allow the concessional rate of tax of ten per cent. on long term capital gain to listed securities (other than unit) and zero coupon bonds.
w.e.f. 1st April, 2015
7.Taxation Regime for Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (Invit)
A specific taxation regime for providing the way the income in the hands of Taxation Regime for Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (Invit is to be taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts.
(i) The listed units of a business trust, when traded on a recognised stock exchange, would attract same levy of securities transaction tax (STT), and would be given the same tax benefits in respect of taxability of capital gains as equity shares of a company i.e., long term capital gains, would be exempt and short term capital gains would be taxable at the rate
of 15%.
(ii) In case of capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, the preferential capital gains regime (consequential to levy of STT) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal. Further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor. The holding period of shares shall also be included in the holding period of such units.
(iii) The income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV. However, withholding tax at the rate of 5 per cent. in case of payment of interest component of income distributed to non-resident unit holders, at the rate of 10 per cent. in respect of payment of interest component of distributed income to a resident unit holder shall be effected by the trust.
(iv) In case of external commercial borrowings by the business trust, the benefit of reduced rate of 5 per cent. tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in section 194LC of the Act.
(v) The dividend received by the trust shall be subject to dividend distribution tax at the level of SPV but will be exempt in the hands of the trust, and the dividend component of the income distributed by the trust to unit holders will also be exempt.
(vi) The income by way of capital gains on disposal of assets by the trust shall be taxable in the hands of the trust at the applicable rate. However, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder. Any other income of the trust shall be taxable at the maximum marginal rate.
(vii) The business trust is required to furnish its return of income.
(viii) The necessary forms to be filed and other reporting requirements to be met by the trust shall be prescribed to implement the above scheme.
w.e.f. 1st October, 2014.
8.Investment Allowance to a Manufacturing Company
Extension of extend deduction available under section 32AC of the Act for investment made in plant and machinery up to 31.03.2017.
Deduction under section 32AC of the Act shall be allowed if the company on or after 1st April, 2014 invests more than Rs.25 crore in plant and machinery in a previous year.
Assessee who is eligible to claim deduction under the existing combined threshold limit of Rs.100 crore for investment made in previous years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under the existing provisions contained in sub-section (1) of section 32AC even if its investment in the year 2014-15 is below the proposed new threshold limit of investment of Rs. 25 crore during the previous year.
w.e.f. 1st April, 2015
9.Extension of the sunset date under section 80-IA for the power sector
With a view to provide further time to the undertakings to commence the eligible activity to avail the tax incentive, it is proposed to amend the section 80-IA to extend the terminal date for a further period up to 31st March, 2017 i.e. till the end of the 12th Five Year Plan.
w.e.f. 1st April, 2015
10.Deduction in respect of capital expenditure on specified business
-Section 35AD investment-linked tax  for the purposes of the “specified business”
Include two new businesses as “specified business”
(a) laying and operating a slurry pipeline for the transportation of iron ore;
(b) setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines.
– insert sub-section (7A) in section 35AD to provide that any asset in respect of which a deduction is claimed and allowed undersection 35AD, shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.
– Amendment in  section 35AD so as to provide that where any deduction has been availed of by the assessee on account of capital expenditure incurred for the purposes of specified business in any assessment year, no deduction under section 10AA shall be available to the  assessee in the same or any other assessment year in respect of such specified business.
As a consequence of this amendment, section 10AA is also proposed to be amended so as to provide that no deduction under section 35AD shall be available in any assessment year to a specified business which has claimed and availed of deduction under section 10AA in the same or any other assessment year.
w.e.f. 1st April, 2015
11.Raising the limit of deduction under section 80C
Raising the limit of deduction allowed under section 80C from the existing Rs. 1 lakh to Rs.1.5 lakh. In view of the same, consequential amendments are proposed in sections 80CCE and 80CCD of the Act.
w.e.f. 1st April, 2015
12.Deduction from income from house property
Amendment in the second proviso to clause (b) of said section 24, so as to increase the limit of deduction on account of interest in respect of property referred to in sub-section (2) of section 23 to two lakh rupees.
w.e.f. 1st April, 2015
13.Concessional rate of tax on overseas borrowing
Amendment in section 194LC to extend the benefit of this concessional rate of withholding tax to borrowings by way of issue of any long-term bond, and not limited to a long term infrastructure bond(concessional rate of withholding tax will now be available in respect of borrowings made before 1st day of July, 2017(earlier 1st July 2015)
Section 206AA of the Act provides for levy of higher rate of withholding tax in case the recipient of income does not provide permanent account number to the deductor. An exception from applicability of section 206AA in respect of payment of interest on long-term infrastructure bonds eligible for benefit under section 194LC is currently provided in sub-section (7) of this section.
w.e.f. 1st October, 2014.
14.Reduction in tax rate on certain dividends received from foreign companies
Section 115BBD Foreign dividends received in financial year 2014-15 and subsequent financial years shall continue to be taxed at the lower rate of 15%.
15.Roll back provision in Advance Pricing Agreement Scheme
Section 92CC: Amendment of the Act to provide roll back mechanism in the APA scheme. The APA may, subject to such prescribed conditions, procedure and manner, provide for determining the arm’s length price or for specifying the manner in which arm’s length price is to be determined in relation to an international transaction entered into by a person during any period not exceeding four previous years preceding the first of the previous years for which the advance pricing agreement applies in respect of the international transaction to be undertaken in future.
w.e.f. 1st October, 2014.
16.Characterisation of Income in case of Foreign Institutional Investors
any security held by foreign institutional investor which has invested in such security in accordance with the regulations made under the SEBI Act, 1992 would be treated as capital asset only so that any income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be in the nature of capital gain.
w.e.f. 1st April, 2015
 [
17.Alternate Minimum Tax
Section 115 JC: Amendment in  Section 115 JC so as to provide that total income shall be increased by the deduction claimed under section 35AD for purpose of computation of adjusted total income.The amount of depreciation allowable under section 32 shall, however, be reduced in computing the adjusted total income.
w.e.f. 1st April, 2015
18.Taxability of advance for transfer of a capital asset
Inserted a new clause (ix) in sub-section (2) of section 56 to provide for the taxability of any sum of money,received as an advance or otherwise in the course of negotiations for transfer of a capital asset. Such sum shall be chargeableto income-tax under the head ‘income from other sources’ if such sum is forfeited and the negotiations do not result in transfer of such capital asset.
A consequential amendment in clause (24) of section (2) is also being made to include such sum in the definition of the term ‘income’.
w.e.f. 1st April, 2015
19.Tax deduction at source from non-exempt payments made under life insurance policy
A new section in the Act to provide for deduction of tax at the rate of 2 per cent. on sum paid under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) of the Act.
 In order to reduce the compliance burden on the small tax payers, it has also been proposed that no deduction under this provision shall be made if the aggregate sum paid in a financial year to an assessee is less than Rs.1,00,000/-.
w.e.f. 1st October, 2014.
 [
Refer Appendix 2


Appendix 1
A.    Individual, Hindu undivided family, association of persons, body of individuals, artificial juridical person.
Upto Rs.2,50,000                                                                 Nil.
Rs. 2,50,001 to Rs. 5,00,000                                                10 per cent.
Rs. 5,00,001 to Rs. 10,00,000                                              20 per cent.
Above Rs. 10,00,000                                                            30 per cent.
B.    In the case of every individual, being a resident in India, who is of the age of sixty years or more but less than eighty years at any time during the previous year,—
Upto Rs.3,00,000                                                                 Nil.
Rs. 3,00,001 to Rs. 5,00,000                                                10 per cent.
Rs. 5,00,001 to Rs.10,00,000                                               20 per cent.
Above Rs. 10,00,000                                                            30 per cent.
C.     in the case of every individual, being a resident in India, who is of the age of eighty years or more at anytime during the previous year,—
Upto Rs. 5,00,000                                                                Nil.
Rs. 5,00,001 to Rs. 10,00,000                                              20 per cent.
Above Rs. 10,00,000                                                            30 per cent.
 Appendix 2- Rationalisation Measures

20.Signing and verification of return of income
Amendment in section 140 of the Act so as to provide that the return shall be verified by the persons specified therein. The manner of verification of return is prescribed under section 139 of the Act.
w.e.f. 1st October, 2014.
21.Rationalisation of taxation regime in the case of charitable trusts and institutions
The existing provisions of section 11 of the Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions subject to various conditions contained in the said section. The primary condition for grant of exemption is that the income derived from property held under trust should be applied for the charitable purposes, and where such income cannot be applied during the previous year, it has to be accumulated in the modes prescribed and applied for such purposes in accordance with various conditions provided in the section. If the accumulated income is not applied in accordance with the conditions provided in the said section, then such income is deemed to be taxable income of the trust or institution.
Section 13 of the Act provides for the circumstances under which exemption under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.
The sections 11, 12, 12A, 12AA and 13 constitute a complete code governing the grant or withdrawal of registration and its cancellation, providing exemption to income, and also the conditions under which a charitable trust or institution needs to function in order to be eligible for exemption. They also provide for withdrawal of exemption either in part or in full if the relevant conditions
are not fulfilled.
Several issues have arisen in respect of the application of exemption regime in cases of trusts or institutions in respect of which clarity in law is required.
The first issue is regarding the interplay of the general provision of exemptions which are contained in section 10 of the Act vis.-a-vis. the specific and special exemption regime covered in sections 11 to 13. As indicated above, the primary objective of providing exemption in case of charitable institution is that income derived from the property held under trust should be applied and utilised for the object or purpose for which the institution or trust has been established. In many cases it has been noted that trusts or institutions which are registered and have been claiming benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. In such circumstances, when the income becomes taxable, then a claim of exemption under general provisions of section 10 in respect of such income is preferred and tax on such income is avoided. This defeats the very objective and purpose of placing the conditions of application of income etc. in respect of income derived from property under trust in the first place.
Sections 11, 12 and 13 are special provisions governing institutions which are being given benefit of tax exemption, it is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigations.
Similar situation exists in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. The provision of section 10(23C) also have similar conditions of accumulation and application of income, investment of funds in prescribed modes etc.
Therefore, it is proposed to amend the Act to provide specifically that where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)]. Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 (except the exemption in respect of agricultural income).
The second issue which has arisen is that the existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalised to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose.
In view of the above, it is also proposed to amend the Act to provide that under section 11 and section 10(23C), income for the purposes of application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.
w.e.f. 1st April, 2015

22.Clarification in respect of section 10(23C) of the Act
Amendment in section 10(23C) by inserting an Explanation that if the Government grant to a university or other educational institution, hospital or other institution during the relevant previous year exceeds a percentage (to be prescribed) of the total receipts (including any voluntary contributions), of such university or other educational institution, hospital or other institution, as the case may be, then such university or other educational institution, hospital or other institution shall be considered as being substantially financed by the Government for that previous year.
w.e.f. 1st April, 2015

23.Cancellation of registration of the trust or institution in certain cases
Amendment in section 12AA of the Act to provide that where a trust or an institution has been granted registration, and subsequently it is noticed that its activities are being carried out in such a manner that,—
(i) its income does not enure for the benefit of general public;
(ii) it is for benefit of any particular religious community or caste (in case it is established after commencement of the Act);
(iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or
(iv) its funds are invested in prohibited modes,
then the Principal Commissioner or the Commissioner may cancel the registration if such trust or institution does not prove that there was a reasonable cause for the activities to be carried out in the above manner.
w.e.f. 1st October, 2014.
24.Anonymous donations under section 115BBC
Amendment in section 115BBC to provide that the income-tax payable shall be the aggregate of the amount of income-tax calculated at the rate of thirty per cent on the aggregate of anonymous donations received in excess of five per cent of the total donations received by the assessee or one lakh rupees, whichever is higher, and the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of the anonymous donations which is in excess of the five per cent of the total donations received by the assessee or one lakh rupees,as the case may be.

w.e.f. 1st October, 2014.

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