The Finance Minister, as part of the Union Budget 2023-24, has announced a number of direct tax and indirect tax proposals/amendments. Below is a high-level summary of few key direct and indirect tax amendments/proposals introduced by the Finance Bill, 2023 (‘FB 2023′):

A. DIRECT TAX

1. Change to Tax Rates in Certain Cases

1. The Finance Act, 2020 had introduced a new optional regime under Section 115BAC of the Income-tax Act, 1961 (‘IT Act’), whereunder individuals and Hindu undivided families (‘HUFs’) could opt to be taxed at the prescribed slab rates, without the benefit of claiming any exemptions (‘New Regime’). This New Regime has now been extended to association of persons, body of individuals etc.
2. The Government has announced new slab rates/ benefits under the New Regime; the key benefit being that the highest surcharge under the new regime would be 25% (as opposed to 37% earlier); thereby reducing the effective tax rate from 42.7% to 39% under the New Regime. The effective tax rate under the earlier regime continues to be 42.7% (i.e., with a surcharge of 37%). In effect, no changes to the earlier regime.
3. The New Regime has been made the default regime now. However, taxpayer has the option to be governed by the earlier regime.

2. Measures Affecting Start-ups

1. Extension of Date of Incorporation for Eligible Start-ups: Under Section 80-IAC of the IT Act, a deduction of an amount equal to 100% of the profits and gains derived from an eligible business is allowed to an eligible start-up for three consecutive assessment years (‘AYs’) out of ten AYs, subject to prescribed conditions, including that the eligible start-up has been incorporated prior to April 01, 2023. It is now proposed to extend the period of incorporation of eligible start-ups to March 31, 2024.
2. Carry Forward and Set Off of Losses: Section 79 of the IT Act restricts the ability of a company, in which public are not substantially interested, from carrying forward tax losses in case of a change in shareholding beyond 51%. However, this Section allows a relaxation to ‘eligible start-ups’ provided all the shareholders of such company as on the last date of the year in which loss was incurred, continue to remain shareholders of the company on the last day of the year in which the loss is sought to be set-off, provided the loss has been incurred during the period of seven years beginning from the year in which the company is incorporated. It is now proposed to extend this period of seven years to ten years.
3. These amendments will take effect from April 01, 2023 and will apply in relation to AY 2023-24 and subsequent AYs.

3. Applicability of Section 56(2)(viib) to Non-residents

As per existing Section 56(2)(viib) of the IT Act, where a company, in which public are not substantially interested, receives any consideration from a resident for issue of shares which exceeds their face value, the difference between the consideration so received and the Rule 11UA value of such shares is taxable in the hands of the company as ‘income from other sources’. Issue of shares to non-residents was not covered under the provision. However, the FB 2023 now seeks to enhance the scope of this provision to include consideration received by the company for issue of shares to non-residents as well. This amendment would apply from AY 2024-25 and onwards.

4. Concessional Rate of Tax on New Manufacturing Co-operative Societies

1.  Currently, Section 115BAB of the IT Act provides for a concessional corporate tax rate of 15% (plus applicable surcharge  and cess) to certain companies engaged in the business of manufacturing or production of any article or thing, subject to, inter alia, the condition that the manufacture or production of the article or thing has commended prior to March 31, 2024.
2.  A new Section 115BAE is now proposed to be inserted to provide similar benefit of concessional rate of tax to co-operative societies, subject to satisfaction of the conditions prescribed. This amendment would apply from AY 2024-25 and onwards.

5. Tax Incentives Relating to IFSC

1. As per existing Section 47(viiad) of the IT Act, any transfer of assets of the ‘original fund’ or of its wholly owned special purpose vehicle, to a resultant fund, in case of its relocation on or before March 31, 2023, is exempt from tax. The FB 2023 proposes to extend this benefit to relocations up to March 31, 2025. This amendment would apply from AY 2023-24 and onwards.
2. The existing Section 10(4E) of the IT Act exempted any income accruing or arising to or received by a non-resident as a result of transfer of non-deliverable forward contracts or offshore derivative instruments or over the counter derivatives, entered into with an offshore banking unit of International Financial Services Centres (‘IFSC’), subject to satisfaction of prescribed conditions. FB 2023 proposes to extend the scope of this exemption to also include any distribution of income on an offshore derivative instrument. It is further clarified that such exempted income will include only such amount that has been charged to tax in the hands of the offshore banking unit under Section 115AD of the IT Act.
3. These amendments would apply from AY 2024-25 and onwards.

6. Taxation of REITs and InvITs

1. As per the scheme of taxation of Real Estate Investment Trust (‘REIT’) and Infrastructure Investment Trust (‘InvIT’), they have been accorded a pass-through status with respect to certain income streams like interest, dividend and rental income, as applicable, received from a special purpose vehicle.
2. The FB 2023 proposes to insert a new Section 56(2)(xii) to provide that any sum received by a unit holder from a business trust which is not: (a) in the nature of the incomes specified under Section 10(23FC) or 10(23FCA), and (b) chargeable to tax under Section 115UA(2) of the IT Act, would be taxable in the hands of the unitholder as ‘income from other sources’. Further, it is provided that any sum received by a unit holder from a business trust on account of redemption of units held by him will be reduced by the cost of acquisition of such units to the extent the cost does not exceed such sum.
3. Section 197 has been amended to allow issuance of lower tax withholding certificates to non-residents in respect of distributions received from such business trusts.
4. These amendments would apply from AY 2024-25 and onwards.

7. Enhancement of Scope of Section 9 in Certain Cases

It is proposed to amend Section 9 of the IT Act to provide that any sum of money in excess of INR 50,000 received by ‘resident but not ordinarily resident’ from a resident, without consideration, would be deemed to accrue or arise in India. This amendment would apply from AY 2024-25 and onwards.

8. Taxation of Capital Gains in Case of Market Linked Debentures

A new Section 50AA is proposed to be inserted to provide that the full value of consideration received or accruing as a result of transfer/ redemption/ maturity of ‘market linked debentures’, as reduced by their cost of acquisition and expense incurred wholly in relation to their transfer/ redemption/ maturity, would be taxable as short-term capital gains under the IT Act. The term ‘market linked debentures’ has been defined to mean “a security by whatever name called, which has an underlying principal component in the form of a debt security and where the returns are linked to the market returns on other underlying securities or indices, and includes any security classified or regulated as a market linked debenture by the Securities and Exchange Board of India”.

9. Conversion of Physical Gold into Electronic Gold Receipts and Vice Versa

Section 47 of the IT Act is proposed to be amended to exempt any conversion of physical gold into electronic gold receipts issued by a vault manager and vice versa. Further, consequential amendments have been made to provide for a carry forward of cost of acquisition benefit and holding period benefit in cases of such conversions. These amendments would apply from AY 2024-25 and onwards.

10. Cost of Acquisition in Certain Cases

Section 55 of the IT Act is proposed to be amended to provide that the ‘cost of acquisition‘ of self-generated intangible asset/ other rights will be ‘nil’. Further, the ‘cost of improvement’ of a capital asset being any intangible asset or any other right, whether self-generated or acquired, would be deemed to be ‘nil’. This amendment would apply from AY 2024-25 and onwards.

11. Full Value of Consideration under JDA

It is clarified that ‘full value of consideration’ under Section 45(5A) of the IT Act, in a transaction involving transfer of a capital asset under a joint development agreement (‘JDA‘), will be taken to be the stamp duty value of share of the assessee in the capital asset, as increased by any consideration received in cash or by a cheque or draft or by any other mode. This amendment would apply from AY 2024-25 and onwards.

12. Limit on Deduction on Reinvestment in Residential Property

Sections 54 and 54F of IT Act provide for deduction on capital gains from the transfer of long-term assets if the assessee invests in a residential property in India within a specified time frame. It is now proposed to amend these provisions to limit on the maximum deduction under these provisions to INR 10,00,00,000. The provisions of the ‘Capital Gains Account Scheme’ have also been consequently amended, limiting the deposit to INR 10,00,00,000. These amendments would apply from AY 2024-25 and onwards.

13. TDS on Income by way of Winnings from Online Games

1. Section 194B of the IT Act is proposed to be amended to provide that the obligation to effect tax deducted at source (‘TDS‘) under this provision would apply where the aggregate amount of payment to a user during the financial year exceeds INR 10,000.
2. Further, a new Section 194BA is proposed to be inserted, which provides that any person responsible for paying another person any income by way of winning from any online game will deduct tax on net winnings in his user account, computed in the prescribed manner. The mode of calculation and manner of compliance with this TDS obligation is yet to be prescribed. This amendment would apply from AY 2024-25 and onwards.

14. Amendment in Relation to Taxation Post Business Reorganisation in Terms of IBC

FB 2023 seeks to substitute a new provision in place of the existing Section 170A of the IT Act, to deal with the assessment of modified returns filed by the successor post business reorganisation in terms of Insolvency and Bankruptcy Code, 2016 (‘IBC‘). Furthermore, it is proposed to decriminalise Section 276A of the Act that provided for prosecution of a liquidator who failed to comply with certain requirements of Section 178 of the IT Act in relation to a company in liquidation. However, ongoing prosecutions will continue. These amendments would apply from AY 2023-24 and onwards.

15. Thin Capitalisation Restriction Not to Apply to Certain NBFCs

It has been proposed that the restriction on deductibility of interest expenditure as per Section 94B of the IT Act would not apply to non-banking financial companies (‘NBFCs‘) ‘as may be notified by the Central Government in the Official Gazette in this behalf’. This amendment would apply from AY 2024-25 and onwards.

16. Taxation of Benefit or Perquisite Received in Cash

FB 2023 seeks to amend Section 28(iv) of the IT Act to clarify that any benefit or perquisite, arising from business or exercise of a profession, in the form of cash or kind or partly in cash or partly in kind, would be chargeable to income-tax under the head ‘profits and gains of business or profession‘. Corresponding amendments are also proposed to Section 194R of the IT Act, which provides for TDS in the hands of the payer of the benefit or perquisite. These amendments would apply from AY 2023-24 and onwards.

17. Increase in Threshold Limits of Presumptive Taxation Scheme for Professionals/ Businesses

It is proposed to increase the threshold limits for presumptive taxation scheme in Section 44AD of the IT Act and Section 44ADA of the IT Act to INR 3,00,00,000 and INR 75,00,000, respectively, subject to a certain condition. These amendments would apply from AY 2024-25 and onwards.

18. Presumptive Taxation Scheme in case of Non-residents

It is proposed to amend Section 44BB and Section 44BBB of the IT Act, which provide for taxation of non-residents on a presumptive basis. It is proposed that where, under either of these provisions, a non-resident has opted to be taxed in any given year, such non-resident, thereafter, would not be allowed to set off unabsorbed depreciation and brought forward losses. These amendments would apply from AY 2024-25 and onwards.

19. Tax Treaty Relief at the Time of TDS under Section 196A of IT Act

Section 196A of the IT Act is sought to be amended to enable the beneficial rate of tax as per the applicable tax treaty, rather than 20% rate as provided for in the existing Section 196A of the ITA, on the payment of any income to a non-resident, in respect of units of mutual fund specified under Section 10(32D) of the IT Act. This amendment would apply from AY 2023-24 and onwards.

20. Removal of Exemption of TDS on Interest on Listed Securities to Residents

In terms of the proviso to Section 193 of the IT Act, no tax was deductible in case of interest payment on securities issued by a company where such securities were in dematerialised form and listed on a recognised stock exchange. This exemption is now being proposed to be removed. This amendment would apply from AY 2024-25 and onwards.

21. Inclusion of Valuation of Inventory under Special Audit

Section 142(2A) of the IT Act empowered the Assessing Officer to direct a special audit of the accounts of the assessee before the completion of assessment if he felt necessary to do so. It is proposed to substitute Section 142(2A) of the IT Act to include the power of the assessing officer to direct a valuation of the inventory of the assessee by a cost accountant. This amendment would apply from AY 2023-24 and onwards.

22. Jurisdiction of High Courts in Case of Non-residents – PBPT Act

1. Currently for the purposes of filing an appeal before the High Court against the adjudicating authority under the Prohibition of Benami Property Transactions Act, 1988 (‘PBPT Act’), is the High Court where the persons against whom such proceedings have been initiated, ordinarily reside or carry on business or personally works for gain. However, in the case of non-residents, the jurisdiction had not been defined.
2. To enable the determination of the jurisdiction of the High Court in the case of non-residents, it has been proposed that the High Court within the jurisdiction of the initiating officer will be the appropriate High Court. This amendment will apply with effect from April 01, 2023.

23. Amendments to Provisions relating to Charitable Trusts and Institutions

1. Several amendments have been proposed for rationalising the provisions relating to charitable trusts and institutions, including amendments to Section 10(23C) and Section 11 to 13 of the IT Act, namely:
   1. In case of corpus fund or loan received on or before March 31, 2021, re-investment/ repayment not allowed as application.
   2. In case of corpus fund or loan received after March 31, 2021, re-investment/ repayment allowed only if made within five years and no violation of specified provisions.
2.  In case of voluntary donation to other charitable institutions, application is proposed to be restricted to 85%. This is applicable from AY 2024-25 and onwards.

24. Time Limits for Assessment/ Reassessment in Certain Cases

1. Time limit for completion of assessment increased from nine to twelve months:
   1. For regular return: from the end of the relevant AY (AY 2022-23 onwards); and
   2. For updated return: from the end of the year in which such return is furnished.
2. Time limit for assessment proceedings pending as on date of search operations to be increased by twelve months.

25. Change to TCS Provisions

The FB 2023 proposes changes to the existing tax collected at source (‘TCS‘) regime under Section 206C(1G) of the IT Act, on certain foreign remittances (other than for the purposes of education or medical treatment) under the Liberalised Remittance Scheme of the Reserve Bank of India and on sale of overseas tour packages, as summarised below:

These changes would be effective from July 1, 2023.

B. INDIRECT TAX

I. Customs

1. Key Legislative Changes to Customs Act: To Take Effect from Date of Enactment of Finance Act, 2023

1. Section 25(4A) of the Customs Act, 1962 (‘Customs Act‘) is being amended to introduce a proviso to the effect that the validity of two years will not apply to exemption notifications issued in relation to multilateral or bilateral trade agreements; obligations under international agreements, treaties, conventions; United Nations’ agencies, diplomats, international organisations; privileges of constitutional authorities; schemes under Foreign Trade Policy or other Central Government schemes having a validity of more than two years; re-imports, temporary imports, goods imported as gifts or personal baggage; any duty of customs imposed under any law in force including integrated tax leviable under Sub-section (7) of Section 3 of the Customs Tariff Act, 1975 (‘Customs Tariff Act‘), other than under Section 12 of the Customs Act.
2. A new Sub-section (8A) is being introduced to Section 127C of the Customs Act to prescribe a time limit of nine months (from the date of application) for disposal of application(s) filed before the Customs Settlement Commission.

2. Key Legislative Changes to Customs Tariff Act: To Take Effect Retrospectively From January 01, 1995

1. Sub-sections (6) and (7) of Section 9 of the Customs Tariff Act is being amended retrospectively, to remove ambiguity and clarify that determination and review for countervailing duty refers to determination and review of countervailing duty in a manner prescribed by rules under the Customs Tariff Act.
2. Sub-sections (5) and (6) of Section 9A of the Customs Tariff Act is being amended retrospectively, to remove ambiguity and clarify that determination and review for anti-dumping duty refers to determination and review in a manner prescribed by rules under the Customs Tariff Act.
3. Section 9C of the Customs Tariff Act is being amended retrospectively, to remove ambiguity and clarify that appeals under this Section lie against the determination or review thereof made by an authority in a manner as specified by rules notified under Sections 8B, 9, 9A and 9B of the Customs Tariff Act. It also seeks to insert an explanation to provide the meaning of determination or review thereof.

3. Indicative List of Import Items on which Basic Customs Duty (‘BCD’) has been Increased^[1]

The rate changes take effect from February 02, 2023.

4. Indicative List of Import Items on which BCD has been Reduced^[2]

The rate changes take effect from February 02, 2023.

II. Goods and Services Tax

1. Key Legislative Changes to CGST Act: To Take Effect from Date of Enactment of Finance Act, 2023 [Except for Change Discussed in Paragraph (vi)]

1. Clause (d) of Sub-section (2) and clause (c) of Sub-section (2A) in Section 10 of the Central Goods and Services tax Act, 2017 (‘CGST Act’) is being amended so as to remove the restriction on registered persons engaged in supplying goods through electronic commerce operators from opting to pay tax under the Composition Levy.
2. Clause (5) of Section 17 of the CGST Act is being amended to provide that input tax credit will not be available in respect of goods or services or both used or intended to be used for activities relating to corporate social responsibility under Section 135 of the Companies Act, 2013.
3. A new Sub-section (1B) is being inserted to Section 122 of the CGST Act so as to extend penal provisions applicable to Electronic Commerce Operators, in case of contravention of provisions relating to supplies of goods made through them by unregistered persons or composition taxpayers.
4. Clause (1) of Section 132 of the CGST Act is being amended to decriminalise the following offences:
   1. Obstructing or preventing any officer in the discharge of his duties under the Act;
   2. Tampering with or destroying any material evidence or documents; and
   3. Failing to supply any information which such person is required to supply or supplying any false information.

   The amendment also increases the monetary threshold for launching prosecution for the offences under the CGST Act from INR 1,00,00,000 to INR 2,00,00,000 except for the offences related to issuance of invoices without supply of goods or services or both.

5. Clause (1) of Section 138 of the CGST Act is being amended so as to exclude persons involved in offences relating to issuance of invoices without supply of goods or services or both, from the option of compounding.
6. Schedule III of the CGST Act is being amended retrospectively, so as to treat the following activities/ transactions as neither supply of goods nor supply of services with effect from July 01, 2017:
   1. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India;
   2. Supply of warehoused goods to any person before clearance for home consumption; and
   3. Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.

   However, the amendment clarifies that where the tax has already been paid in respect of such transactions/ activities during the period July 1, 2017 to January 31, 2019, no refund of such tax hall be available.

2. Legislative Changes to IGST Act: To Take Effect from Date of Enactment of Finance Act, 2023

1. The definition of ‘non-taxable online recipient’ under clause (16) of Section 2 of the Integrated Goods and Services tax Act, 2017 (‘IGST Act’) is being amended so as to provide for taxability of online information and database access or retrieval services (‘OIDAR‘) provided by any person located in a non-taxable territory to an unregistered person receiving the said services (and located in the taxable territory). Further, the amendment also seeks to clarify that the persons registered solely in terms of Clause (vi) of Section 24 of CGST Act will be treated as unregistered person for the purpose of the said clause.[3]
2. The definition of ‘online information and database access or retrieval services’ contained under clause (17) of Section 2 of the IGST Act, is being amended to remove the condition of the said supply being essentially automated and involving minimal human intervention.
3. The proviso to clause (8) of Section 12 of the IGST Act is being omitted so as to specify the place of supply, irrespective of destination of the goods, in cases where the supplier of services and recipient of services are located in India.

[1]  This list is indicative and not exhaustive.

[2] This list is indicative and not exhaustive.

[3] Section 24(vi) of the CGST Act refers to persons who are required to deduct tax under Section 51 of the CGST Act and inter-alia includes a government department/ agency and a local authority.