Key Direct Tax Measures under the Finance Act

The key direct tax amendments made by the Finance Act are as under:

i.     Profits arising from the receipt of capital asset by partner on dissolution or reconstitution of firm have been made taxable in the hands of the firm. In such cases, the fair market value of the capital asset will be the full value of consideration for computing taxes;

ii.    The term “liable to tax” with respect to a person and a country has been defined to mean that there is an income tax liability on such person under the laws of that country and would also include such person who has subsequently been exempted from such liability under the law of that country;

iii.   The definition of ‘slump sale’ has been expanded to include the transfer of an undertaking ‘by any means’ including transfer for non-cash consideration e.g. slump exchange. It has also been provided that the fair market value of the undertaking calculated in the prescribed manner will be treated as full value of consideration for tax computation purposes. It has also been clarified that the value of capital asset being goodwill, which has not been acquired by the taxpayer by purchase from previous owner, will be taken as nil while computing net worth;

iv.   “Goodwill” has been excluded from the definition of “block of assets” and, consequently, no depreciation will be allowable on the same. In this regard consequential amendments have been made for computation of written down value of block of assets which include goodwill;

v.     The application of the equalization levy has been expanded as follows:

•     ‘online sale of goods’ and ‘online provision of services’ has been defined to include broad categories of e-commerce related activities such as acceptance of offer for sale, placing the purchase order, acceptance of the purchase order, payment of consideration or supply of goods or provision of services, partly or wholly. The broad language is likely to create ambiguity in relation to the applicability of the provision;

•     It has been clarified that consideration received or receivable from e-commerce supply or services will include:

a.    consideration for sale of goods irrespective of whether the e-commerce operator owns the goods but will exclude consideration for sale of goods which are owned by an Indian resident or by a permanent establishment (‘PE’) of a non-resident if sale of such goods is effectively connected with such PE; and

b.    consideration for provision of services irrespective of whether such service is provided or facilitated by the e-commerce operator but will exclude consideration for provision of services which are provided by an Indian resident or by a PE of a non-resident if such provision of services is effectively connected with such PE.

•     It has also been clarified that the consideration received or receivable which is taxable as ‘royalty or fees for technical services’ will not be subject to equalisation levy.

vi.  Further incentives have been granted to units based out of IFSCs or GIFT city:

•     Income earned by a non-resident by way of royalty on account of a lease of an aircraft paid by a unit of an IFSC and in respect of interest income arising to a non-resident on account of leasing of aircraft to a unit of an IFSC has been exempted from tax; and

•     Capital gains arising on relocation of a foreign fund to India have been exempted from tax subject to certain conditions.

vii. Withholding tax liability on dividend received by a foreign institutional investor will be computed after granting benefit under the respective tax treaty wherever applicable;

viii. The eligibility criteria for claiming tax exemptions by Sovereign Wealth Fund (‘SWF’) and Pension Fund (‘PF’) has been relaxed with relaxation in following key conditions:

•     Requirement of 100% investment in eligible infrastructure company conditions by Category I and II AIFs has been relaxed and now such Category I and II AIFs can invest up to 50% in non-eligible investments;

•     Category-I or Category-II AIF can now invest in an Infrastructure Investment Trust (InvIT);

•     Investment through holding company has been allowed subject to satisfaction of prescribed conditions;

•     Investment in NBFC-IDF/IFC (non-banking finance company-infrastructure debt fund/Infrastructure finance company) has been allowed subject to satisfaction of prescribed conditions; and

•    Under the existing regime, SWF/PFs are not permitted to undertake any commercial activity. This condition has been substituted for condition that “SWF/PFs will not participate in day to day operation of investee”. It has also been clarified that appointing director and executive director for monitoring the investment would not amount to participation in day to day operation.

ix.    No requirement to withhold tax on dividend payments, if such dividend is paid to a business trust being an infrastructure investment trust or a real estate investment trust by a special purpose vehicle held by such business trust.

Published In:Inter Alia - Quarterly Edition - March 2021 [ English Chinese japanese ]
Date: March 31, 2021