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Budget 2021: Other Key Proposals (Part 7)

04 Mar 2021

The Finance Bill, 2021 proposes several amendments to rationalize the provisions of tax deduction and tax collection at source and improve the effectiveness of tax administration in India.

To provide certainty and relief to institutional investors, the Finance Bill, 2021 (Bill) proposes to rationalise certain provisions relating to tax deduction and tax collection at source. The Bill also extends certain benefits to eligible start-ups by a year and proposes to penalize non-filers of income-tax returns.

With the assessment (before the tax assessing officer) and first appeal proceedings (before the Commissioner (Appeals) being already made faceless, to encourage greater efficiency and transparency in tax administration in India, the Bill suggests amendments to make the second appeal proceedings (before the tax tribunals) faceless as well. Additionally, due to several procedural delays, the experience of taxpayers in relation to the current advance ruling regime has not been satisfactory and therefore the Bill proposes an overhaul of the existing regime. It also proposes steps to provide certainty regarding tax assessments by inter alia reducing the time period for issue of notice for assessment or reassessment of income.

We discuss some of these developments below.

  • Amendments relating to tax deduction at source (TDS)/tax collection at source (TCS) provisions
    • The Bill proposes an amendment to provide that in case of a payee (registered as a Foreign Institutional Investor (FII) with Securities and Exchange Board of India) based in a treaty jurisdiction (and such payee has furnished the tax residency certificate), tax shall be withheld at the rate of 20% or the rate of tax provided in the treaty, whichever is lower. This amendment puts to rest uncertainty for FIIs following the decision of the Supreme Court in the PILCOM v. CIT case, pursuant to which certain payers had begun withholding tax at the specified rate of 20% even in cases wherein the treaty provided a lower rate of tax.This amendment will take effect from 1 April 2021 and is expected to provide significant relief to FIIs.
    • The Income Tax Act (ITA) did not provide for TDS on purchase of goods so far. However, through the Finance Act, 2020, transactions of sale / purchase of goods were brought within the ambit of the TCS provisions (i.e. the ‘seller’ was mandated to collect TCS at 0.1% on sale of goods, subject to fulfilment of specified conditions). The Bill now proposes to provide for TDS at 0.1% by the ‘buyer’ for paying any sum to any resident (i.e. ‘seller’) for purchase of goods if (i) the buyer’s total sales, gross receipts or turnover from business exceeded INR 10 crores during the immediately preceding financial year, and (ii) the value of goods purchased from the seller exceeds INR 50 lakhs.The general rule however is that a transaction on which there is a TDS or TCS obligation under any other provision of the ITA would not be subjected to TDS under the newly proposed provision. The only exception to this general rule is, if on a transaction, the buyer and seller both need to apply 0.1% TDS and 0.1% TCS respectively, the transaction would only be subject to TDS at 0.1% (i.e. TCS obligation would not have to be discharged).

      The amendment will take effect from 1 July 2021.

    • The Bill proposes to introduce a special provision to provide for a higher rate for TDS for non-filers of income-tax returns. This provision will apply to a person who has not filed tax returns for two financial years immediately preceding the year in which tax is required to be deducted or collected (as the case may be) and the time limit for filing such returns has expired for both the years. Further, the aggregate of tax deducted at source and tax collected at source for the specified person should be at least INR 50,000 in each of these two years. However, a non-resident who does not have a permanent establishment in India will not be covered by this provision.This amendment will take effect from 1 July 2021.
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