Simplified Laws Guide to Taxation and Legal Concern Income Tax amendments related to Business are discussed here. I have covered 8 general points. The points specifically applicable to certain industries are not written here.
Point # 1 Payment by an employer of employee contribution to a fund on or before the due date
Example – MK Steels Private Limited, has 20 employees. They deduct Rs.36,000 from employees towards Employee Provident Fund towards Employees share.
This amount is to be deposited to the department on or before the 15th of the subsequent month. If the amount is not paid within the due date, the company has to consider Rs.36,000 as income and pay Income Tax on Rs.36,000.
Does this mean that the company can keep Rs.36,000 with them? No, under the Provident Fund Act if the amount is not paid, penal provisions including imprisonment can be initiated.
So, the deposit of the contribution can neither be denied nor delayed.
Point # 2 LLPs are not eligible for presumptive taxation
Example – Court Matters, a registered partnership firm carrying Legal profession has earned Rs.40,00,000 as income during the year. How much tax do they pay?
They have an option to consider 50% as a deduction towards expenses and pay tax on the balance amount. This is called presumptive taxation applicable to all specified Professionals, HUF, or partnership firms. A Limited Liability Partnership (LLP) is not eligible for this benefit u/s 44ADA.
Point # 3 Increase in threshold limit for Tax audits
To promote digital transactions, if 95% of the receipts and payments are made through electronic modes, then the threshold limit for the tax audit is proposed to be increased from the present limit of Rs.5 Crore to Rs.10 Crores.
Point # 4 No depreciation on Goodwill
Example – ABC company acquires XYZ company for Rs.2 crores. The value of assets in the company is Rs.1.20 Crores. The difference amount is paid by ABC towards intangible assets of the company such as the market reach, brand visibility, customer base, etc. The excess amount of Rs.80 Lakhs is called a premium or payment towards Goodwill.
After the acquisition, ABC would show in their books, Goodwill as an intangible asset and take depreciation as per the applicable rates.
Proposed – Government says Goodwill is towards brand visibility and hence, in general, is not a depreciable asset, and depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value.
Impact – companies who were booking depreciation on Goodwill will end up paying more taxes.
Point # 5 Transfer of capital asset of a firm at the time of dissolution
Example – Amar, Akbar, and Antony are 3 partners in a firm. They have decided to dissolve the firm and distribute the net assets among themselves. They have a property in the firm’s books and its Fair Market Value on the date of dissolution is Rs.75 Lakhs. The capital account balance in their accounts together is Rs.50 Lakhs, after crediting a revaluation reserve of Rs.30 Lakhs.
The firm has to pay Capital Gain Tax on the profit arising from the transfer of a capital asset to its partners at the time of dissolution. In the above case, the firm has to pay Capital Gain tax on Rs.25 Lakhs (Rs.75 Lakhs less Rs.50 Lakhs balance in the capital account)
Proposed Provision – Capital Gain tax has to be paid on Rs.55 Lakhs (Rs.75 Lakhs less Rs.20 Lakhs, without allowing Revaluation reserve). This means any amount credited to the capital account on account of revaluation of assets will not be reduced from the Fair Market Value.
Point # 6 Extension of benefit u/s 54GB
Example – Ms. Rama sold her flat for 80 Lakhs, resulting in a Long-Term Capital Gain of Rs.50 Lakhs. She has the option of reinvesting this amount in Capital Gain Bond u/s 54EC or buy another house u/s 54 or invest by subscribing to the equity shares of an eligible start-up.
Existing Provision – The outer date of the transfer of property was 31st March 2021
Proposed – To encourage start-ups, the outer date of transfer of property is extended to 31st March 2022. Thus, those who sell their property can reinvest in the shares of eligible start-ups during this financial year as well.
Point # 7 Reduction in the time limit for reopening of cases
Example – Ms. Kavitha filed Income Tax Return for Financial Year 2019-20. The department can pick up this case for Scrutiny Assessment on or before 30th September 2021. If the Notice is not sent by this date, it is generally considered as the return is accepted by the department and no more questions will be asked.
What if the department discovers, after 2 years, that around Rs.10,00,000 of income was not declared by Kavitha while filing the return? For such cases, even if the regular assessment due date is expired, the department can re-open the file by issuing a Notice u/s 148.
Existing Provision – Such Notice u/s 148 can be issued up to 6 years from the end of the assessment year (in the case of Kavitha – on or before 2027)
Proposed – The time limit is reduced to 3 years (In case of Kavitha – on or before 2024) and suppose, the income undeclared is Rs.50,00,000 and above, then the time limit is 10 years (In case of Kavitha if the amount had been Rs.50,00,000– 2031)
Point # 8 Constitution of Dispute Resolution Committee for small and medium taxpayers:
Example – Mr. Kannan’s Return was processed under Income Tax Scrutiny assessment and the Officer has levied an additional tax of Rs.9,00,000. What options are there for Kannan if he is not willing to pay this amount and wants to dispute the demand raised by the department?
Through straightjacket like approach, he can apply with CIT(Appeals); later can go to ITAT (Tribunal); next stop at High Court; finally land in Supreme Court.
Instead of going through the above route, taxpayers whose taxable income is less than Rs.50 Lakhs and the aggregate amount of variation proposed in the Assessment Order is Rs.10 Lakhs or less, can approach the Dispute Resolution Committee (DRC) for faster resolution of the dispute. Through this new window, the Government proposes to reduce the number of disputes through the traditional approach and get faster relief to the taxpayer.
