Background

Finance Minister Arun Jaitley, presented the Budget for the year 2016-17 on 29^th February, 2016. We have come up with a detailed analysis of the changes proposed by the Finance Minister in a series of articles. This is Part-II of the “Major Amendments in Income Tax, 1961 through the Finance Bill, 2016” series. It will highlight the existing provisions, proposed provisions and the date from which the proposed provisions will be effective on the above mentioned topics.

Option of lower tax rate for new manufacturing companies

1. Under the newly introduced Section 115BA, a domestic company shall have the option to pay income-tax in respect of its total income @ 25%, if, –
   • Company has been setup and registered on or after 1st day of March, 2016;
   • Company is engaged in the business of manufacture or production of any article or thing and is not engaged in any other business;
   • Company while computing its total income has not claimed any benefit of
     1. Profit linked deductions u/s 10AA;
     2. Accelerated depreciation u/s 32(1)(iia);
     3. Additional depreciation u/s 32AC and 32AD;
     4. Investment allowance u/s 33AB and 33ABA;
     5. Deduction of expenditure on scientific research u/s 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA)and 35(2AB);
     6. Deduction of expenditure on eligible projects or schemes u/s 35AC;
     7. Deduction of expenditure on specified business u/s 35AD;
     8. Deduction of expenditure on agricultural extension project u/s 35CCC;
     9. Deduction of expenditure on skill development project u/s 35CCD;
     10. Any deduction in respect of certain income under Part-C of Chapter-VI-A other than the provisions of section 80JJAA;
   • Company has not set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to above;
   • Option is exercised in the prescribed manner before the due date of furnishing of income.
2. Effective From: 1st April, 2017

Lower taxation rate for companies turnover <= Rs. 5 crores

1. In the First Schedule, Part II, Paragraph E of the Income Tax Act, a new tax rate has been added for domestic companies with a turnover of Rs. 5 crores or less. Such companies, shall now be charged tax @29% instead of 30%
2. Effective From: 1st April, 2016

Incentives for Startups

With a view to providing an impetus to start-ups and facilitate their growth in the initial phase of their business, it has been proposed to provide certain incentives to a start-up. For the purpose of incentives, the following definitions have been prescribed.

1. Definitions
   • Eligible Start-up has been defined to mean a company which follows the following conditions
     1. It is incorporated after 1st April, 2016 but before 1st April, 2019;
     2. Its total turnover does not exceed Rs 25 crores in any previous year from 1st April, 2016 to 21st March, 2021; and
     3. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification.
   • Eligible business has been defined to mean a business involving innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

2. 100% profit deductible for 3 out of 5 years
   • A new Section 80-IAC has been inserted to provide a deduction of 100% profits and gains derived by an eligible start-up from an eligible business.
   • Such deduction of 100% profits is available to a start-up for any 3 consecutive years out of 5 years beginning from the year in which the eligible start-up is incorporated.
   • Certain conditions u/s 80-IA shall apply to the eligible start-ups taking the benefit of deduction u/s 80-IAC
   • Effective From:1st April, 2017.

3. Capital Gain not to be charged on investment in unit of a specified fund
   • In order to promote the start-up ecosystem in the country, it is envisaged in ‘start-up India Action Plan’ to establish a Fund of Funds which intends to raise Rs 2500 crores annually for 4 years to finance the start-ups.
   • A new Section 54EE is proposed to be inserted to provide exemption from capital gains tax if the long term capital gains proceeds are invested by an assessee in units of such specified fund, as may be notified by the Central Government
   • Amount of capital gain not chargeable to tax:
     1. Where the amount of investment >= capital gain, the entire capital gain shall not be charged to tax.
     2. Where the amount of investment < capital gain, proportionate amount of capital gain, shall not be charged to tax.
     3. In any case, the investment in the units of the specified fund shall be allowed up to Rs. 50 lakhs in the year when the original asset was transferred and in the subsequent year.
   • Lock-in-period for such investment: 3 years.
   • Effective From: 1st April, 2017

4. Capital Gain not to be charged on investment in an eligible start-up
   • Current Provision: The existing provisions of section 54GB provide exemption from tax on long term capital gains in respect of the gains arising on account of transfer of a residential property, if such capital gains are invested in subscription of shares of a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 subject to other conditions specified therein.
   • Proposed Provision:
     1. It is proposed, by way of an addition u/s 54GB, that long term capital gains arising on account of transfer of a residential property shall not be charged to tax if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible start-up subject to the condition that
        • Individual or HUF holds more than 50% shares of such start-up, and
        • Such company utilizes the amount invested in shares to purchase new asset.
     2. It is proposed that the expression “new asset” would now also include computers or computer software in case of technology driven start-ups.
   • Effective From: 1st April, 2017.

Transactions not regarded as transfer

1. Sovereign Gold Bond Scheme, 2015
   • Under Section 47, a new subsection (viic) has been added to provide that any redemption of Sovereign Gold Bond under the Scheme, by an individual shall not be treated as transfer and therefore shall be exempt from tax on capital gains.
   • Effective From:1st April, 2017.

2. Additional condition for conversion of company into LLP
   • Current Provision: Existing provisions of Section 47(xiiib) provides that conversion of a private limited or unlisted public company into Limited Liability Partnership (LLP) shall not be regarded as transfer, if certain conditions are fulfilled.
   • Proposed Provision: In addition to the existing conditions, a new condition is proposed to be added. The new condition is that the value of the total assets in the books of accounts of the company in any of the three previous years preceding the previous year in which the conversion takes place, should not exceed Rs. 5 crores.
   • Effective From: 1st April, 2017.

3. Consolidation of “plans” within a “scheme” of mutual fund
   • Current Provision: Under the provisions of section 47(xviii), any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund is not chargeable to tax.
   • Proposed Provision: SEBI has issued guidelines for consolidation of mutual fund plans within a scheme. Hence to extend the tax exemption, available on merger or consolidation of mutual fund schemes, to the merger or consolidation of different plans in a mutual fund scheme, a new section(xix) is proposed to be added to Section 47, which provides that any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund shall not be considered transfer for capital gain tax purposes and thereby shall not be chargeable to tax.
   • Effective from: 1st April, 2017.

Sunset for deduction for SEZ units

1. Current Provision: Under Section 10AA, profit linked deductions are allowed for units in SEZ for profit derived from export of articles or things or services.

2. Proposed Provision: No deduction shall be available to units commencing manufacture or production of article or thing or start providing services on or after 1st April, 2021.

3. Effective from: 1st April, 2017

Concessional tax on income from patents

1. In order to encourage indigenous research & development activities and to make India a global R & D hub, the Government has decided to put in place a concessional taxation regime for income from patents.
2. Hence, it is proposed to insert new section 115BBF to provide that where the eligible assessee has any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the concessional rate of 10% ( plus applicable surcharge and cess) on the gross amount of royalty.
3. No expenditure or allowance in respect of such royalty income shall be allowed under the Act.
4. An eligible assessee has been defined to mean a person resident in India, who is the true and first inventor of the invention and whose name is entered on the patent register as the patentee in accordance with Patents Act, 1970 and where there is more than one person registered as patentee under Patents Act, 1970, every such person who is the true and the first inventor of the invention.
5. Effective from: 1st April, 2017.

Deduction of provision for bad and doubtful debts for NBFCs

1. Current Provision: Currently, u/s 36(1)(viia), a deduction limited 5% of the gross total income is allowed in respect of any provision for bad and doubtful debt in computing the profits of a public financial institutions, State financial corporations and State industrial investment corporation

2. Proposed Provision: Since Non-Banking Financial companies (NBFCs) are also engaged in financial lending to different sectors of society, it is proposed to allow such a deduction upto 5% of the total income to NBFCs as well for provision of bad and doubtful debts.

3. Effective From: 1st April, 2017.

Deduction on payment to Railways

1. Current Provision: The existing provisions of section 43B provide that any sum payable by the assessee by way of tax, cess, duty or fee, employer contribution to Provident Fund and superannuation fund, interest on loan from certain institutions, etc., is allowable as deduction only in the year it is actually paid.

2. Proposed Provision: Now, it is proposed expand the scope of section 43B to include payments made to Indian Railways for use of Railway assets within its ambit.

3. Effective From: 1st April, 2017.