Finance Bill, 2023: Key Direct And Indirect Tax Amendments

AZB & Partners logo

AZB & Partners is one of India's premier law firms with 500+ lawyers and offices across the country. The firm was founded in 2004 with a clear purpose to provide reliable, practical and full–service advice to clients, across all sectors. Having grown steadily since its inception, AZB & Partners now has offices across Mumbai, Delhi, Bangalore, Pune and Chennai. We are recognized by most international publications for our legal expertise.

The Finance Minister, as part of the Union Budget 2023-24, has announced a number of direct tax and indirect tax proposals/ amendments. Below is a high-level summary of few key direct.

To print this article, all you need is to be registered or login on Mondaq.com.

The Finance Minister, as part of the Union Budget 2023-24, has announced a number of direct tax and indirect tax proposals/ amendments. Below is a high-level summary of few key direct and indirect tax amendments/ proposals introduced by the Finance Bill, 2023 ('FB 2023'):

A. DIRECT TAX

  1. Change to Tax Rates in Certain Cases
  1. The Finance Act, 2020 had introduced a new optional regime under Section 115BAC of the Income-tax Act, 1961 ('IT Act'), whereunder individuals and Hindu undivided families ('HUFs') could opt to be taxed at the prescribed slab rates, without the benefit of claiming any exemptions ('New Regime'). This New Regime has now been extended to association of persons, body of individuals etc.
  2. The Government has announced new slab rates/ benefits under the New Regime; the key benefit being that the highest surcharge under the new regime would be 25% (as opposed to 37% earlier); thereby reducing the effective tax rate from 42.7% to 39% under the New Regime. The effective tax rate under the earlier regime continues to be 42.7% (i.e., with a surcharge of 37%). In effect, no changes to the earlier regime.
  3. The New Regime has been made the default regime now. However, taxpayer has the option to be governed by the earlier regime.
  1. Measures Affecting Start-ups
  1. Extension of Date of Incorporation for Eligible Start-ups: Under Section 80-IAC of the IT Act, a deduction of an amount equal to 100% of the profits and gains derived from an eligible business is allowed to an eligible start-up for three consecutive assessment years ('AYs') out of ten AYs, subject to prescribed conditions, including that the eligible start-up has been incorporated prior to April 01, 2023. It is now proposed to extend the period of incorporation of eligible start-ups to March 31, 2024.
  2. Carry Forward and Set Off of Losses: Section 79 of the IT Act restricts the ability of a company, in which public are not substantially interested, from carrying forward tax losses in case of a change in shareholding beyond 51%. However, this Section allows a relaxation to 'eligible start-ups' provided all the shareholders of such company as on the last date of the year in which loss was incurred, continue to remain shareholders of the company on the last day of the year in which the loss is sought to be set-off, provided the loss has been incurred during the period of seven years beginning from the year in which the company is incorporated. It is now proposed to extend this period of seven years to ten years.
  3. These amendments will take effect from April 01, 2023 and will apply in relation to AY 2023-24 and subsequent AYs.
  1. Concessional Rate of Tax on New Manufacturing Co-operative Societies
  1. Currently, Section 115BAB of the IT Act provides for a concessional corporate tax rate of 15% (plus applicable surcharge and cess) to certain companies engaged in the business of manufacturing or production of any article or thing, subject to, inter alia, the condition that the manufacture or production of the article or thing has commended prior to March 31, 2024.
  2. A new Section 115BAE is now proposed to be inserted to provide similar benefit of concessional rate of tax to co-operative societies, subject to satisfaction of the conditions prescribed. This amendment would apply from AY 2024-25 and onwards.
  1. Tax Incentives Relating to IFSC
  1. As per existing Section 47(viiad) of the IT Act, any transfer of assets of the 'original fund' or of its wholly owned special purpose vehicle, to a resultant fund, in case of its relocation on or before March 31, 2023, is exempt from tax. The FB 2023 proposes to extend this benefit to relocations up to March 31, 2025. This amendment would apply from AY 2023-24 and onwards.
  2. The existing Section 10(4E) of the IT Act exempted any income accruing or arising to or received by a non-resident as a result of transfer of non-deliverable forward contracts or offshore derivative instruments or over the counter derivatives, entered into with an offshore banking unit of International Financial Services Centres ('IFSC'), subject to satisfaction of prescribed conditions. FB 2023 proposes to extend the scope of this exemption to also include any distribution of income on an offshore derivative instrument. It is further clarified that such exempted income will include only such amount that has been charged to tax in the hands of the offshore banking unit under Section 115AD of the IT Act.
  3. These amendments would apply from AY 2024-25 and onwards.
  1. Taxation of REITs and InvITs
  1. As per the scheme of taxation of Real Estate Investment Trust ('REIT') and Infrastructure Investment Trust ('InvIT'), they have been accorded a pass-through status with respect to certain income streams like interest, dividend and rental income, as applicable, received from a special purpose vehicle.
  2. The FB 2023 proposes to insert a new Section 56(2)(xii) to provide that any sum received by a unit holder from a business trust which is not: (a) in the nature of the incomes specified under Section 10(23FC) or 10(23FCA), and (b) chargeable to tax under Section 115UA(2) of the IT Act, would be taxable in the hands of the unitholder as 'income from other sources'. Further, it is provided that any sum received by a unit holder from a business trust on account of redemption of units held by him will be reduced by the cost of acquisition of such units to the extent the cost does not exceed such sum.
  3. Section 197 has been amended to allow issuance of lower tax withholding certificates to non-residents in respect of distributions received from such business trusts.
  4. These amendments would apply from AY 2024-25 and onwards.
  1. TDS on Income by way of Winnings from Online Games
  1. Section 194B of the IT Act is proposed to be amended to provide that the obligation to effect tax deducted at source ('TDS') under this provision would apply where the aggregate amount of payment to a user during the financial year exceeds INR 10,000.
  2. Further, a new Section 194BA is proposed to be inserted, which provides that any person responsible for paying another person any income by way of winning from any online game will deduct tax on net winnings in his user account, computed in the prescribed manner. The mode of calculation and manner of compliance with this TDS obligation is yet to be prescribed. This amendment would apply from AY 2024-25 and onwards.
  1. Currently for the purposes of filing an appeal before the High Court against the adjudicating authority under the Prohibition of Benami Property Transactions Act, 1988 ('PBPT Act'), is the High Court where the persons against whom such proceedings have been initiated, ordinarily reside or carry on business or personally works for gain. However, in the case of non-residents, the jurisdiction had not been defined.
  2. To enable the determination of the jurisdiction of the High Court in the case of non-residents, it has been proposed that the High Court within the jurisdiction of the initiating officer will be the appropriate High Court. This amendment will apply with effect from April 01, 2023.
  1. Amendments to Provisions relating to Charitable Trusts and Institutions
  1. Several amendments have been proposed for rationalising the provisions relating to charitable trusts and institutions, including amendments to Section 10(23C) and Section 11 to 13 of the IT Act, namely:
    1. In case of corpus fund or loan received on or before March 31, 2021, re-investment/ repayment not allowed as application.
    2. In case of corpus fund or loan received after March 31, 2021, re-investment/ repayment allowed only if made within five years and no violation of specified provisions.
    1. Time Limits for Assessment/ Reassessment in Certain Cases
    1. Time limit for completion of assessment increased from nine to twelve months:
      1. For regular return: from the end of the relevant AY (AY 2022-23 onwards); and
      2. For updated return: from the end of the year in which such return is furnished.
      S. No. Nature of Remittance Current Rate Proposed Rate
      (i) Overseas tour package 5%, without any threshold limit 20%, without any threshold limit
      (ii) Any other case of remittance 5% of the amount or the aggregate of amount in excess of INR 7,00,000. 20%, without any threshold limit


      These changes would be effective from July 1, 2023.

      B. INDIRECT TAX

      I. Customs

        Key Legislative Changes to Customs Act: To Take Effect from Date of Enactment of Finance Act, 2023

      1. Section 25(4A) of the Customs Act, 1962 ('Customs Act') is being amended to introduce a proviso to the effect that the validity of two years will not apply to exemption notifications issued in relation to multilateral or bilateral trade agreements; obligations under international agreements, treaties, conventions; United Nations' agencies, diplomats, international organisations; privileges of constitutional authorities; schemes under Foreign Trade Policy or other Central Government schemes having a validity of more than two years; re-imports, temporary imports, goods imported as gifts or personal baggage; any duty of customs imposed under any law in force including integrated tax leviable under Sub-section (7) of Section 3 of the Customs Tariff Act, 1975 ('Customs Tariff Act'), other than under Section 12 of the Customs Act.
      2. A new Sub-section (8A) is being introduced to Section 127C of the Customs Act to prescribe a time limit of nine months (from the date of application) for disposal of application(s) filed before the Customs Settlement Commission.
      1. Sub-sections (6) and (7) of Section 9 of the Customs Tariff Act is being amended retrospectively, to remove ambiguity and clarify that determination and review for countervailing duty refers to determination and review of countervailing duty in a manner prescribed by rules under the Customs Tariff Act.
      2. Sub-sections (5) and (6) of Section 9A of the Customs Tariff Act is being amended retrospectively, to remove ambiguity and clarify that determination and review for anti-dumping duty refers to determination and review in a manner prescribed by rules under the Customs Tariff Act
      3. Section 9C of the Customs Tariff Act is being amended retrospectively, to remove ambiguity and clarify that appeals under this Section lie against the determination or review thereof made by an authority in a manner as specified by rules notified under Sections 8B, 9, 9A and 9B of the Customs Tariff Act. It also seeks to insert an explanation to provide the meaning of determination or review thereof.
      1. Indicative List of Import Items on which Basic Customs Duty ('BCD') has been Increased 1

      The rate changes take effect from February 02, 2023.

      Sr. No. Customs Tariff Commodity From (%) To (%)
      1. 2902 50 00 Styrene 2% 2.5%
      2. 4005 Compound rubber 10% 25% or INR 30 per Kg, whichever is lower
      3. 7113, 7114 Articles of precious metals 20% 25%
      4. 7117 Imitation Jewelry 20% or INR 400 per Kg, whichever is higher. 25% or INR 600 per Kg, whichever is higher.
      5. 8712 00 10 Bicycles 30% 35%
      6. 8414 60 00 Electric Kitchen Chimney 7.5% 15%
      7. 9053 Toys and parts of toys (other than part of electronic toys) 60% 70%
      1. Indicative List of Import Items on which BCD has been Reduced 2

      The rate changes take effect from February 02, 2023.

      Sr. No. Customs Tariff Commodity From (%) To (%)
      1. 1520 00 00 Crude glycerin for use in manufacture of Epichlorohydrin 7.5% 2.5%
      2. 2207 20 00 Denatured ethyl alcohol for use in manufacture of industrial chemicals 5% Nil
      3. 2529 22 00 Acid grade fluorspar (containing by weight more than 97% of calcium fluoride) 5% 2.5%
      4. Any chapter Camera lens and its inputs/parts used in manufacture of camera module of cellular mobile phone 2.5% Nil
      5. 7102, 7104 Seeds for use in manufacturing of rough lab grown diamonds 5% Nil
      6. 39,40,58,70,


      II. Goods and Services Tax

      1. Key Legislative Changes to CGST Act:To Take Effect from Date of Enactment of Finance Act, 2023 [Except for Change Discussed in Paragraph (vi)]
      1. Clause (d) of Sub-section (2) and clause (c) of Sub-section (2A) in Section 10 of the Central Goods and Services tax Act, 2017 ('CGST Act') is being amended so as to remove the restriction on registered persons engaged in supplying goods through electronic commerce operators from opting to pay tax under the Composition Levy.
      2. Clause (5) of Section 17 of the CGST Act is being amended to provide that input tax credit will not be available in respect of goods or services or both used or intended to be used for activities relating to corporate social responsibility under Section 135 of the Companies Act, 2013.
      3. A new Sub-section (1B) is being inserted to Section 122 of the CGST Act so as to extend penal provisions applicable to Electronic Commerce Operators, in case of contravention of provisions relating to supplies of goods made through them by unregistered persons or composition taxpayers.
      4. Clause (1) of Section 132 of the CGST Act is being amended to decriminalise the following offences:
        1. Obstructing or preventing any officer in the discharge of his duties under the Act;
        2. Tampering with or destroying any material evidence or documents; and
        3. Failing to supply any information which such person is required to supply or supplying any false information.

        The amendment also increases the monetary threshold for launching prosecution for the offences under the CGST Act from INR 1,00,00,000 to INR 2,00,00,000 except for the offences related to issuance of invoices without supply of goods or services or both.

        1. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India;
        2. Supply of warehoused goods to any person before clearance for home consumption; and
        3. Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.Schedule III of the CGST Act is being amended retrospectively, so as to treat the following activities/ transactions as neither supply of goods nor supply of services with effect from July 01, 2017:

        1. Legislative Changes to IGST Act: To Take Effect from Date of Enactment of Finance Act, 2023
        1. The definition of 'non-taxable online recipient' under clause (16) of Section 2 of the Integrated Goods and Services tax Act, 2017 ('IGST Act') is being amended so as to provide for taxability of online information and database access or retrieval services ('OIDAR') provided by any person located in a non-taxable territory to an unregistered person receiving the said services (and located in the taxable territory). Further, the amendment also seeks to clarify that the persons registered solely in terms of Clause (vi) of Section 24 of CGST Act will be treated as unregistered person for the purpose of the said clause. 3
        2. The definition of 'online information and database access or retrieval services' contained under clause (17) of Section 2 of the IGST Act, is being amended to remove the condition of the said supply being essentially automated and involving minimal human intervention.
        3. The proviso to clause (8) of Section 12 of the IGST Act is being omitted so as to specify the place of supply, irrespective of destination of the goods, in cases where the supplier of services and recipient of services are located in India.

        Footnotes

        1. This list is indicative and not exhaustive.

        2. This list is indicative and not exhaustive.

        3. Section 24(vi) of the CGST Act refers to persons who are required to deduct tax under Section 51 of the CGST Act and inter-alia includes a government department/ agency and a local authority.

        The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.