May 2023

BCAJ February 2022

From Finance Bill to Finance Act, 2023

Dr. CA Mayur B. Nayak

(Emerging Trends in Passing the Finance Bills)

The Finance Bill 2023 proposed 120 amendments to the Income-tax Act, 1961. However, the Finance Act, 2023 was eventually passed with 64 amendments to the Finance Bill. The Finance Bill was passed amidst uproar in Parliament without any discussion at all.

These days there is hardly any debate (for various reasons) in Parliament while passing the Finance Bill, with the result that not only amendments proposed by the Finance Bill get passed, but also additional amendments moved by the Government, which are not part of the original Finance Bill, also get passed easily.

It is suggested that provisions of a Finance Bill having significant impacts should be discussed and debated in Parliament or a select committee thereof and/or with various stakeholders, as it is always a good practice to have a consultative process before making significant amendments that have far-reaching impacts. This would prevent piecemeal amendments to the Income-tax Act, which are often carried out to reverse the judgments favouring assesses, or amendments to curb exceptional misuse of provisions by a few.

Recent amendments to the taxation of Charitable Trusts are a classic example of how amendments without a consultative process could result in enormous compliance burden and complexities. These amendments are a death knell to small and medium size trusts doing yeoman services at grassroots levels where the government has failed to reach.

Two significant amendments made by the Finance Act, 2023, which will have far-reaching impact, and which were not part of the original proposals, are:

(i) increase in the rate of TDS on Fees for Technical Services (FTS) and Royalty payments to non-residents from 10% to 20%, and

(ii) Gains on the sale of investments in Debt Mutual Funds to be taxed as short-term capital gains.

As far as TDS rates on FTS and Royalty are concerned, it will result in an increase in the cost of import of technology/services where the payment terms are net of tax, as the burden will be passed on to the Indian entrepreneur. The lower rate prescribed in a tax treaty may apply, but that claim is subject to a host of compliances such as beneficial ownership, obtaining of Tax Residency Certificate, filing form 10F, and/or obtaining PAN, filing of income-tax return in India etc. The amendments to the TDS rates on FTS and Royalty payments to non-residents have been quite frequent and which only shows that government is not sure of what it means by the ease of doing business. The Memorandum explaining provisions of the Finance Bill 2013 stated that the rate is increased from 10% to 25% because most treaties provide rates ranging from 10% to 25%. However, realizing the burden of TDS on Indian entrepreneurs (in cases of “net of tax” payments), the Finance Act 2015 again reduced the rate from 25% to 10%. The rate is again increased from 10% to 20% vide the Finance Act, 2023. These flip flops, that too without any explanation this time, raise doubts about the stability of tax laws in India.

Another significant amendment carried out by the Finance Act, 2023, was the expansion of the scope of section 50AA to specified Mutual Funds which was originally restricted to only Market Linked Debentures. Memorandum explaining the provisions in the Finance Bill, 2023 provided that “In order to tax the capital gains arising from the transfer or redemption or maturity of these securities as short-term capital gains at the applicable rates, it is proposed to insert a new Section 50AA in the Act…”. It then proposed to tax gains on the “Market Linked Debentures” (predominantly in the form of a debt where the returns are linked to market returns) as short-term capital gains at applicable rates, instead of long-term gains @ 10% without indexation. However, vide the Finance Act 2023, this tax treatment is also extended to units of specified mutual funds (having investments in equity shares of 35% or less) acquired on or after 1st April 2023. This change, having a significant impact on the Mutual Fund industry, AMCs, and investors; was not part of the Finance Bill 2023 and hence there is no explanation or stated logic.

Frequent changes in the tax regime defy one of the basic canons of a fair tax system, namely, “Certainty”. And this is not an aberration, but a repeated trend. The same thing happened with the taxation of dividends and the failed experiment with the Fringe Benefits Tax (FBT). With so many changes, the Income-tax Act, 1961 looks like a bridge with innumerable repair patches. To illustrate, there are fifty-nine sections in section 80 series, from 80A to 80U with many subsections, and similar is the case with section 115 series which has almost 108 sections (115A to 115VZC) spanned over fifteen chapters. There are many such provisions in the Income-tax Act, 1961 that have sub-sections, several explanations, provisos, sub-provisos, and so on, with the result that they look like a Banyan tree, where it is difficult to trace their origin. A classic case is section 10(23C) with over 20 provisos, some with their own explanations. We hope that going forward major changes will be made only after proper debate, discussion, and consultation with the stakeholders, that too once in a few years instead of every year, and assessee-friendly decisions are not reversed as a matter of routine.

Best Regards,
Dr. CA Mayur B. Nayak

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