March 2023
High Hits and Hard Hits of the Finance Bill 2023
Dr. CA Mayur B. Nayak, Editor
On 1st February 2023, the Finance Minister (FM) presented the last full-fledged Union Budget of the present Government as India will go to polls in early 2024. The current Budget was against the backdrop of major global disruptions in the supply chain due to the Ukraine War, economic sanctions imposed by the USA, the Pandemic, and other natural calamities. The good part is that despite all odds, the Indian economy is showing signs of resilience and faring better than other large economies. It was an opportune time for the Government to consolidate the measures taken so far and build on them to lay a solid foundation for a developed India. Cross sections of society were expecting some relief from the Budget. The January 2023 Editorial made an appeal to the Government to provide much-deserved relief to the Middle-class population of India which was hard hit during the Pandemic and is currently reeling under rising inflation. It is heartening to note the Government chose to provide some relief to the Middle-class and endeavored to enhance the Ease of Living in India.
However, it is observed over the years that all good intentions mentioned in the Budget speech may not be reflected in the fine print of the Finance Bill. In the words of Nani A. Palkhivala “India is the fabled land of contrasts, but there is no disparity so glaring and costly as that between the prized ends solemnly pronounced in the budget speech every year and the provisions of the annual Finance Bill which are so admirably calculated to frustrate those objectives.”
With this background let us discuss some of the “high hits and hard-hitting” provisions of the Finance Bill, 2023.
One of the high hits of the Finance Bill is an increase in the limit of the rebate of income tax under section 87A for individuals from Rs. 5 Lakhs to Rs. 7 Lakhs under the new regime of taxation for individuals, which is now the default regime (old regime is optional). It is accompanied by the withdrawal of various tax incentives/deductions from the Gross Total Income. The objective as stated by the Government is to let people decide where to invest their money, rather than to invest compulsorily to save taxes. Thus, withdrawal of tax rebates/deductions for premiums on life insurance policies, PF & PPF contributions, medical insurance premia, donations to charitable trusts, etc. to get the lower tax rates will have far-reaching and long-term consequences.
Let us look at the macro impact. The government started spending on infrastructure and capital projects in a big way since 2020, – during the Pandemic and continues to do so. Private spending/investments on capital projects have increased manifold in the recent past. This will result in a substantial increase in production. This would necessitate a corresponding increase in consumption as well. According to the reply by the Government in the Lok Sabha on 13th February 2023, the total number of individual taxpayers with annual income between Rs. 5 lakhs to Rs. 10 lakhs for AY 2021-2022 were about 1.4 crores. Assume that one crore assesses opt for the new tax regime with a tax-free income of up to Rs. 7 lakhs without any tax incentive-linked savings. This is likely to make available an additional amount of about Rs. 2 lakh crores in the hands of the middle-class taxpayers which they are most likely to spend on consumer durables, necessities of life and other semi-luxury products, etc. This will generate demand for goods, add to the exchequer by way of GST and boost the Indian economy with an increased GDP. However, this may reduce savings in the country with a consequent impact on private-sector capital investment. Along with the Middle-class, the role and contribution of the MSME sector have also been recognized and given some relief too.
Coming to the high hits of the Union Budget, one finds that the FM has laid down clear paths and priorities in seven important areas of the economy, termed as ‘Saptarishi,’ to guide the country through the Amrit Kaal with an eye on India @ 100 in 2047. The focus of the government would be on inclusive growth of all sections of society, promotion of green growth and environment-friendly lifestyle, investments and infrastructure, technology, empowering youth, and financial sector reforms. Thus, when we look at the Union Budget, we find a sincere attempt to address all sections of society with a grand vision for years to come.
However, there are also some serious hard-hitting provisions in the Finance Bill.
The proposed increase in the TCS rates from 5% to 20% under section 206C (1G) of the Income-tax Act, 1961 (“Act”) in respect of remittances under the Liberalised Remittance Scheme or for overseas tour packages of any amount and other cases, except for education and medical treatment exceeding Rs. 7 lakhs, will cause genuine hardship to people. TCS should be used only for tracking a transaction and not as a revenue generation mechanism. In the recent past, the burden of TCS and TDS has increased manifold, especially on individuals and the MSME sector. A holistic relook at various provisions of TDS/TCS is the need of the hour, with the objective of reducing compliances and encouraging ease of doing business.
Another hard-hitting proposal is with respect to the proposed amendment of section 115TD which seeks to tax the accreted income, of a charitable trust or an institution, being the difference between the fair market value of all the assets as reduced by the liabilities if the trust or institution fails to make an application under section 10(23C) or 12A within the specified time period. The proposed amendment does not provide any leeway even in a case where the delay may be due to any reasonable cause or for a very short period for justified reasons. The irony is that the provision mandates paying the tax on such accreted income within 14 days from the end of the concerned previous year in which such failure has occurred. This is against the principle of natural justice. An elaborate procedure for the opportunity to condone the delay in genuine cases and issuance of show cause notice before such an action should be provided. It is suggested that a one-time EXIT SCHEME should be introduced with a reasonable tax rate for all trusts/institutions which do not wish to claim exemption owing to onerous compliance burden or otherwise. The reason being that trusts/institutions holding properties for ages will not have the cash flow to pay taxes on the fair market values of their assets.
Another disturbing provision in the recent past was regarding the denial of exemption under sections 10(23C) or 11, 12 if the return of income is filed late even by a day. Small trusts/NGOs do not have qualified or paid staff to look after accounts and compliances. Therefore, denial of exemptions and taxing trusts on their accreted income at the maximum marginal rate will be a death blow to small and medium-sized trusts/NGOs.
In recent years, the regime for taxation of charitable trusts and other charitable institutions in India has witnessed unprecedented changes and an increase in compliance burden, virtually strangulating the sector. Therefore, the entire law relating to trusts/NGOs should be rewritten to make it simple. Small trusts should be subjected to bare minimum compliances. All in all, trusts/NGOs should be dealt with more dignity and respect, as they are contributing immensely by providing relief to the poor and downtrodden masses. (Read the Editorial in BCAJ, October 2022 issue, titled “Uncharitable Treatment to Charities?). I think the time has come for providing “Ease of Social Services in India”.
Section 10(10D) read with section 56 of the Act is sought to be amended to provide the taxability of maturity sum on life insurance policies with an annual premium exceeding Rs. 5 Lakhs as income from other sources. One fails to understand why such maturity sum is sought to be taxed under section 56 as income from other sources rather than as capital gains as in the case of ULIPs. It is stated that the amendment is to tax High Net worth Individuals (HNIs). Why deprive HNIs of securing their future in a country which is a welfare state for only selected classes of society? Alternatively, introduce a passbook system for the HNIs to pay them pensions in their old age in proportion to their contribution to the exchequer. To quote Nani A. Palkhivala, “in trying to achieve the objective of levelling of income, our annual budgets merely succeed in widening the gulf between the dishonest rich and the poor and narrowing the gap between the honest rich and the poor.”
What is heartening to see is the sincerity with which the government has planned to implement the Budget Proposals. Prime Minister, Mr. Narendra Modi, conducting 12 webinars on Budget implementation is unprecedented. Barring a few unreasonable proposals, the Budget is in the right direction and if implemented well, can lead India to greater heights. Let’s hope and trust that these provisions will be suitably modified before they are passed by Parliament. The need of the hour is to build trust between the bureaucracy and the people at large by enforcing provisions of laws in a just, fair and humane manner!
Best Regards,
Dr. CA Mayur B. Nayak
Editor
However, it is observed over the years that all good intentions mentioned in the Budget speech may not be reflected in the fine print of the Finance Bill. In the words of Nani A. Palkhivala “India is the fabled land of contrasts, but there is no disparity so glaring and costly as that between the prized ends solemnly pronounced in the budget speech every year and the provisions of the annual Finance Bill which are so admirably calculated to frustrate those objectives.”
With this background let us discuss some of the “high hits and hard-hitting” provisions of the Finance Bill, 2023.
One of the high hits of the Finance Bill is an increase in the limit of the rebate of income tax under section 87A for individuals from Rs. 5 Lakhs to Rs. 7 Lakhs under the new regime of taxation for individuals, which is now the default regime (old regime is optional). It is accompanied by the withdrawal of various tax incentives/deductions from the Gross Total Income. The objective as stated by the Government is to let people decide where to invest their money, rather than to invest compulsorily to save taxes. Thus, withdrawal of tax rebates/deductions for premiums on life insurance policies, PF & PPF contributions, medical insurance premia, donations to charitable trusts, etc. to get the lower tax rates will have far-reaching and long-term consequences.
Let us look at the macro impact. The government started spending on infrastructure and capital projects in a big way since 2020, – during the Pandemic and continues to do so. Private spending/investments on capital projects have increased manifold in the recent past. This will result in a substantial increase in production. This would necessitate a corresponding increase in consumption as well. According to the reply by the Government in the Lok Sabha on 13th February 2023, the total number of individual taxpayers with annual income between Rs. 5 lakhs to Rs. 10 lakhs for AY 2021-2022 were about 1.4 crores. Assume that one crore assesses opt for the new tax regime with a tax-free income of up to Rs. 7 lakhs without any tax incentive-linked savings. This is likely to make available an additional amount of about Rs. 2 lakh crores in the hands of the middle-class taxpayers which they are most likely to spend on consumer durables, necessities of life and other semi-luxury products, etc. This will generate demand for goods, add to the exchequer by way of GST and boost the Indian economy with an increased GDP. However, this may reduce savings in the country with a consequent impact on private-sector capital investment. Along with the Middle-class, the role and contribution of the MSME sector have also been recognized and given some relief too.
Coming to the high hits of the Union Budget, one finds that the FM has laid down clear paths and priorities in seven important areas of the economy, termed as ‘Saptarishi,’ to guide the country through the Amrit Kaal with an eye on India @ 100 in 2047. The focus of the government would be on inclusive growth of all sections of society, promotion of green growth and environment-friendly lifestyle, investments and infrastructure, technology, empowering youth, and financial sector reforms. Thus, when we look at the Union Budget, we find a sincere attempt to address all sections of society with a grand vision for years to come.
However, there are also some serious hard-hitting provisions in the Finance Bill.
The proposed increase in the TCS rates from 5% to 20% under section 206C (1G) of the Income-tax Act, 1961 (“Act”) in respect of remittances under the Liberalised Remittance Scheme or for overseas tour packages of any amount and other cases, except for education and medical treatment exceeding Rs. 7 lakhs, will cause genuine hardship to people. TCS should be used only for tracking a transaction and not as a revenue generation mechanism. In the recent past, the burden of TCS and TDS has increased manifold, especially on individuals and the MSME sector. A holistic relook at various provisions of TDS/TCS is the need of the hour, with the objective of reducing compliances and encouraging ease of doing business.
Another hard-hitting proposal is with respect to the proposed amendment of section 115TD which seeks to tax the accreted income, of a charitable trust or an institution, being the difference between the fair market value of all the assets as reduced by the liabilities if the trust or institution fails to make an application under section 10(23C) or 12A within the specified time period. The proposed amendment does not provide any leeway even in a case where the delay may be due to any reasonable cause or for a very short period for justified reasons. The irony is that the provision mandates paying the tax on such accreted income within 14 days from the end of the concerned previous year in which such failure has occurred. This is against the principle of natural justice. An elaborate procedure for the opportunity to condone the delay in genuine cases and issuance of show cause notice before such an action should be provided. It is suggested that a one-time EXIT SCHEME should be introduced with a reasonable tax rate for all trusts/institutions which do not wish to claim exemption owing to onerous compliance burden or otherwise. The reason being that trusts/institutions holding properties for ages will not have the cash flow to pay taxes on the fair market values of their assets.
Another disturbing provision in the recent past was regarding the denial of exemption under sections 10(23C) or 11, 12 if the return of income is filed late even by a day. Small trusts/NGOs do not have qualified or paid staff to look after accounts and compliances. Therefore, denial of exemptions and taxing trusts on their accreted income at the maximum marginal rate will be a death blow to small and medium-sized trusts/NGOs.
In recent years, the regime for taxation of charitable trusts and other charitable institutions in India has witnessed unprecedented changes and an increase in compliance burden, virtually strangulating the sector. Therefore, the entire law relating to trusts/NGOs should be rewritten to make it simple. Small trusts should be subjected to bare minimum compliances. All in all, trusts/NGOs should be dealt with more dignity and respect, as they are contributing immensely by providing relief to the poor and downtrodden masses. (Read the Editorial in BCAJ, October 2022 issue, titled “Uncharitable Treatment to Charities?). I think the time has come for providing “Ease of Social Services in India”.
Section 10(10D) read with section 56 of the Act is sought to be amended to provide the taxability of maturity sum on life insurance policies with an annual premium exceeding Rs. 5 Lakhs as income from other sources. One fails to understand why such maturity sum is sought to be taxed under section 56 as income from other sources rather than as capital gains as in the case of ULIPs. It is stated that the amendment is to tax High Net worth Individuals (HNIs). Why deprive HNIs of securing their future in a country which is a welfare state for only selected classes of society? Alternatively, introduce a passbook system for the HNIs to pay them pensions in their old age in proportion to their contribution to the exchequer. To quote Nani A. Palkhivala, “in trying to achieve the objective of levelling of income, our annual budgets merely succeed in widening the gulf between the dishonest rich and the poor and narrowing the gap between the honest rich and the poor.”
What is heartening to see is the sincerity with which the government has planned to implement the Budget Proposals. Prime Minister, Mr. Narendra Modi, conducting 12 webinars on Budget implementation is unprecedented. Barring a few unreasonable proposals, the Budget is in the right direction and if implemented well, can lead India to greater heights. Let’s hope and trust that these provisions will be suitably modified before they are passed by Parliament. The need of the hour is to build trust between the bureaucracy and the people at large by enforcing provisions of laws in a just, fair and humane manner!
Best Regards,
Dr. CA Mayur B. Nayak
Editor
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