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 Part-I of the “Major Amendments in Income Tax, 1961 through the Finance Bill, 2016” series will highlight the existing provisions, proposed provisions and the date from which the proposed provisions will be effective on the below mentioned topics.

Rebate of Income tax to certain individuals

1. Current Provision:Under Section 87A, an assessee whose total income <= Rs 5 lakhs was entitled to a deduction of 100% of the income tax payable by him or Rs. 2,000/-, whichever is less.

2. Proposed Provision:Now, this limit of Rs. 2,000/- has been proposed to be increased to Rs. 5,000/-.

3. Effective from:1st April, 2017

Deductions in respect of rents paid

1. Current Provision:Under Section 80GG, an assessee who lived in a rented premises and did not receive house rent allowance from his employer, was entitled to a deduction of in respect of house rent paid by him
   • in excess of 10% of his total income, subject to a ceiling of 25% thereof or
   • 2,000/- per month, whichever is less.

2. Proposed Provision:Now, this limit of Rs. 2,000/- has been proposed to be increased to Rs. 5,000/-, i.e. from Rs 24,000/- per annum to Rs. 60,000/- per annum

3. Effective from:1st April, 2017

Presumptive Income

1. For Business:
   1. Current Provision:
      • The existing section 44AD (applicable to individual, HUF or partnership firm) provides that in the case an assessee is engaged in an eligible business having total turnover < Rs. 1 crore, following shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profit and gains of business or profession”
        1. 8% of the total turnover or gross receipts, or,
        2. a sum higher than the aforesaid sum declared by the assessee in his return of income,
      • Further, proviso to Section 44AD(2) states that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed as above.
      • Section 44AA states the persons carrying on business or profession, who need to maintain books of accounts.
   2. Proposed Provision:
      • Now, it is proposed to make the benefit of this section available to eligible business with a turnover < Rs 2 crores instead of Rs. 1 crore.
      • It is further proposed to omit the proviso to section 44AD(2) and accordingly, in case of eligible assessee being a firm, the salary and interest paid to its partners shall not be allowed to be deducted from the income computed as above.
      • It is also proposed to substitute sub-sections (4) and (5) of the aforesaid section. Hence, where an assessee declares profit for any previous year in accordance with Section 44AD and he declares profit for any of the succeeding 5 assessment years not in accordance with Section 44AD, he shall be ineligible to claim the benefit of this section for 5 assessment years subsequent to the assessment year in which the profit has not been declared in accordance with this Section.
      • It is also proposed by way of sub-section (5) that, an assessee to whom the above provisions as per point (c) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as per Section 44AA and get them audited and furnish a report of such audit as per Section 44AB.
      • Accordingly, existing clause (iv) of section 44AA(2) is proposed to be replaced so as to provide that every person carrying on the business shall, if the provisions as per point (c) are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax, keep and maintain such books of account and other documents for computing his total income in accordance with the provisions of this Act.
   3. Effective from:1st April, 2017

2. For Profession:
   1. Current Provision:Currently, the presumptive tax regime does not apply to an assessee, who is carrying on profession or earning income in the nature of commission or brokerage or carrying on any agency business and who has claimed deduction under any of the section 10AA, 10A, 10B, 10BA or deduction under any provisions of Chapter VI-A. Currently, no provision currently exists for paying tax on presumptive income for professionals.
   2. Proposed Provision:
      • Section 44ADA has been introduced for presumptive tax regime for professionals.
      • The new presumptive tax regime for professionals is applicable only to assessees engaged in the following professions:
        1. legal,
        2. medical,
        3. engineering,
        4. architecture,
        5. accountancy,
        6. technical consultancy,
        7. interior decoration or
        8. profession notified by the Board in the Official Gazette, being the profession of authorised representative and film artist (actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue writer and dress designer)
      • The assesses engaged in the above professions, having gross receipts <= Rs 50 lakhs, following shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profit and gains of business or profession”
        1. 50% of the total gross receipts, or,
        2. a sum higher than the aforesaid sum declared by the assessee in his return of income,
   3. Effective from:1st April, 2017

Audit of accounts

1. Current Provision:Under Section 44AB, the following persons are required to get their books audited:
   • Any person carrying on business, with a turnover > Rs 1 crores
   • Any person carrying on profession, with a gross receipt > Rs 25 lakhs

2. Proposed Provision:
   • Under the Finance Bill, 2016, this limit of gross turnover/ receipt for audit of accounts has been proposed to be increased to Rs. 50 lakhs for profession.
   • In the case of an assessee, who is covered under the new proposed section 44ADA, the audit of books of account is required if he claims that the profits and gains from the profession are lower than the profits and gains computed as per new section 44ADA and if his income exceeds the maximum amount which is not chargeable to income-tax.
3. Effective from: 1st April, 2017

Section 35 Deductions

* Infrastructure facility has been defined to include a road including toll road, a bridge or a rail system; highway projects including housing or other activities being an integral part of the highway project; a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; a port, airport, inland waterway, inland port or navigational channel in the sea.

** The company undertaking such project shall have entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body

Recognised Provident Fund,  National Pension Scheme, Superannuation Funds

Ceiling for tax exemption on contributions by employer to the credit of an employee participating in RPF

1. Current Provision:Rule 6 of Part A of Fourth Schedule, provides that contributions made by employer to the credit of an employee participating in RPF, which are in excess of 12% of the salary of the employee, are liable to tax in the hands of the employee.

2. Proposed Provision:It is proposed to amend the said rule so as to provide an upper ceiling of Rs. 1,50,000/- to such contribution by the employer.

3. Effective from:1st April, 2017.

4. On 8^th March, 2016, FM withdrew this proposal

POEM

The concept of Place of Effective Management (POEM) which was to be made applicable from 1st April, 2016, will now be made applicable from 1st April, 2017.

GAAR

The government is committed to implement General Anti Avoidance Rules (GAAR) from 1.4.2017.