Legislative Updates-
CHANGES MADE TO THE FINANCE ACT, 2023
The President of India gave his assent to the Finance Bill, 2023, on March 31st 2023, to become the Finance Act, 2023. This Act proposes changes and amendments to the Direct and Indirect Tax Laws to give effect to the financial proposals of the Central Government for the financial year 2023-2024. The important amendments made through the Finance Act have been explained and elaborated in detail below:
1. Taxation of Income from royalty and fees in the hands of Non-Residents.
Section 115A of the Income Tax Act, 1961 (“Act”) provides for the Tax rate for payments of Dividend, Royalty, and fees for the services received by the Non-Residents. Section 115(1)(b)(A) and (B) of the Act provided for a tax of 10% when payment concerning Royalty or fee for technical service is received by any non-resident or a foreign company from India, provided that such income must not be connected to any permanent place in India. The Finance Act, 2023 amended the provisions and brought the tax rate from 10% to 20% pertaining to royalty and fees for technical services by a non-resident or foreign companies U/s 115(1)(b)(A) & (B). A new proviso has also been inserted in Section 115(1)(a)(A) of the Act, which introduced a tax of 10% on the dividend received from any unit in the International Financial Services Centre (IFSC). In the case of non-residents, where the tax treaty provides for a rate higher than 10% or in case India does not have a tax treaty with the jurisdiction of the non-resident, the change may result in an additional tax burden.
2. Measures for Growth of the International Financial Services Centre (IFSC).
According to the Finance Act 2023, the alternative investment funds stated in the IFSC on shares issued by unlisted Indian companies would be excluded from the angel tax. It also amended the meaning of ‘original fund’ to aid the tax-neutral relocation of offshore funds wholly owned and controlled by the Government of Dubai to the IFSC. Additionally, it reduced the tax rate on dividend payouts made by IFSC units from 20% to 10%. This adjustment will encourage non-resident investments in IFSC. It also planned to encourage dividend income earned from the business of leasing aircraft to IFSC entities and to exempt capital gains from share transfers made through domestic companies.
3. Taxation of Business Trust.
The Finance Act, 2023 further introduced that business trusts will be taxed on distributions which are made in the form of repayment of debt or proceed from amortization of debt under the head “Income from Other Sources” u/s 56(2)(xii). Earlier, unit holders of business trusts were not taxed on such capital payments, but now they will have to pay tax at a rate of 40% for non-residents and tax slab rates for residents.
The amendment has invalidated the benefit available u/s 10(23FE) of the Act, which provided relief to the extent distributions made to sovereign wealth funds (SWFs) and pension funds (PFs) were in the nature of debt repayments from business trusts. Further, the taxable income of unit holders will be calculated on the “specified sum” received in the previous year for the unit held at any time during that year. It further delineates that the cost of acquisition of the business trust must be reduced from any kind of amount which a unit holder is receiving from trust that doesn’t fall under the ambit of Section 10(23FC) or Section 10(23FCA) of the Act and is not taxable under Sections 56(2)(xii) or 115UA(2) of the Act.
4. Taxation of Online Gaming.
The Finance Act, 2023 also proposes to bring a whopping 30% tax rate on the net winnings of online gaming upon withdrawals. Though no rules have been provided to compute the net winnings but the provisions of Section 206AB(3) of the Act will not be applicable to withholding tax on earnings from online gaming.
5. Taxation of Debt Mutual Funds.
A specified mutual fund can be referred to as a mutual fund which invests not more than 35% of the total proceeds in equity shares of domestic companies. The Finance Act, of 2023 introduced a special provision through Section 50AA of the Act, which deems capital gains through the transfer of specified mutual funds to be regarded as short-term capital gains acquired on or after 1st April 2023. The acquisition cost and transfer-related costs or redemption at maturity will be subtracted from the capital gains calculation. As a result of this change, capital gains on transfers of units of specific mutual funds are no longer computed with the benefit of indexation of the acquisition cost. Instead, they are subject to the applicable slab rates for resident investors. Other categories of funds, including ETFs, funds of funds, international funds, and gold funds, are also expected to feel the effects of this move in addition to debt funds.
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