The Finance Bill 2021 Enacted After Significant Amendments

THE FINANCE ACT 2021

THE FINANCE BILL 2021 ENACTED AFTER SIGNIFICANT AMENDMENTS

THE FINANCE ACT 2021

THE FINANCE BILL 2021 ENACTED AFTER SIGNIFICANT AMENDMENTS

INTRODUCTION computing the ‘net worth’ which is the deemed ‘cost of acquisition’ of such The Finance Bill 2021 was presented in the undertaking, the value of any goodwill Indian Parliament on 1 February 2021 (Finance of business or profession (other than Bill) as part of the Budget proposals (see our goodwill acquired by purchase from a Ergo on direct tax related budget proposals previous owner) would need to be here). On 24 March 2021, it was passed by the taken as NIL. Indian Parliament with certain amendments. Some of these amendments are significant, While we await notification of the rules including the clarification on equalisation levy for computing fair market value of the provisions and certain important changes from ‘undertaking’, it would be interesting to a mergers and acquisitions point of view, such see the interplay of deemed valuation as the deemed valuation provision for slump vis-à-vis the actual sales consideration, sale and rationalization of tax provisions whether the valuation will be arrived at related to dissolution or reconstitution of a basis an itemized approach or partnership firm. After receiving the lumpsum approach, and whether the Presidential assent on 28 March, it is now in value of liabilities would be considered force (Finance Act). in arriving at the deemed valuation.

Key amendments and effect thereof are The amendment is effective from FY summarized below: 2020-21 and is therefore applicable for slump sale deals undertaken during FY Mergers and acquisitions related 2020-21. With the deemed valuation provisions in place for slump sale, it amendments – would be important to have a valuation report on record to demonstrate . Deemed sale consideration made compliance with the provisions. applicable to slump sale . Rationalisation of provisions The existing provisions for concerning tax on dissolution or computation of capital gains on slump reconstitution of specified entities sale (section 50B of the Income Tax Act 1961 (IT Act)) require capital The Finance Bill had proposed to levy gains/loss to be computed based on capital gains tax on a partnership firm, the difference between actual sale Association of Persons (AOP) or Body consideration and ‘net worth’ of such of Individuals (BOI), in case of transferred undertaking. In computing distribution of assets to a partner or such ‘net worth’, depreciable assets are member, as the case may be, upon taken at their written down value as per dissolution or reconstitution of the IT Act and other assets shall be taken firm/AOP/BOI. However, a lot more as per their book value (except for clarity was desired as the proposals assets for which deduction is fully were quite ambiguous. availed under section 35AD are taken at NIL). The Finance Act has rationalised the proposed amendments and the The Finance Act has introduced a provisions as enacted are summarised deeming fiction whereby the fair below: market value of the undertaking / division (computed in a prescribed o Section 9B is inserted in the IT Act, manner) is deemed to be the value of whereby if a partner receives any consideration for computing capital capital asset and / or stock-in- gains in slump sale cases. Moreover, in trade from a firm upon dissolution

THE FINANCE ACT 2021

or reconstitution of the firm, the dissolution of AOP/ BOI vis-à-vis firm shall be deemed to have their members. transferred such capital asset and / or stock-in-trade to the partner The amendments are effective from FY in the year of receipt of such 2020-21. capital asset and / or stock-in- trade. The profits and gains arising . Clarification regarding depreciation from such deemed transfer shall on goodwill forming part of existing be taxable in the hands of the firm block of assets as ‘income from business or profession’ or ‘capital gain’, in The Finance Bill had proposed that accordance with the provisions of goodwill shall not be considered as a the IT Act. It also provides that for depreciable asset. However, the computing profit and gains from Finance Bill did not specify what would such deemed transfer, the fair happen to the amount of goodwill market value of the capital asset which formed part of an existing block or stock on the date of its receipt of assets. by the partner shall be deemed to be the full value of consideration. The Finance Act has made amendments in section 43(6) of the IT o Section 45(4) of the IT Act has Act to provide that written down value been substituted to provide that if (WDV) of block of assets shall be a partner receives any capital reduced by the difference between asset and / or money from a firm actual cost of goodwill falling within in connection with the such block of assets and the reconstitution of the firm, then any depreciation allowed / allowable on profit or gains arising from such such goodwill up to 31 March 2020. receipt by the partner shall be deemed to be capital gains in the It is also specified that the amount of such hands of the firm, and a formula reduction shall not exceed the WDV of the has been prescribed for block of assets. computing the gains arising to the firm. In this regard, it is expressly The amendment is effective from FY 2020-21. provided that in computing the balance in the partner’s capital in Amendments specific to non- the books of the firm, any increase on account of revaluation of any residents – asset or due to self-generated goodwill or self-generated asset . Concerns regarding applicability of shall not be taken into account. equalisation levy partly addressed

Effective 1 April 2020, a new 2% levy o To mitigate any double taxation at the firm’s level due to was made applicable to the simultaneous application of consideration receivable by a non- section 9B and substituted section resident “e-commerce operator” for “e- 45(4), section 48 of the IT Act has commerce supply or services” been amended to allow reduction provided or facilitated by it to Indian of gains attributable to the capital residents, persons using Indian IP asset transferred by the firm in address and non-residents in certain computing income under section cases (subject to satisfaction of certain 45(4). The manner of computing conditions). such gains attributable to capital asset shall be prescribed by the The Finance Act clarifies that Government. equalisation levy would not apply to the following:

o The aforesaid provisions also apply on reconstitution or (i) Consideration received / receivable for goods owned by a person resident in India or by

THE FINANCE ACT 2021

permanent establishment in recognized stock exchange set up India of a person non-resident in an IFSC, to investment divisions in India, if such sale is of offshore banking units which effectively connected with located in an IFSC and registered such permanent establishment; as a Category-III Alternative Investment Fund (AIF) (subject to (ii) Consideration for provision of conditions). services by a person resident in India or by permanent The Finance Act replaces such establishment in India of a requirement of the investment person non-resident in India if divisions of offshore banking unit such provision of services is being registered as a Category III effectively connected with AIF with a requirement of being such permanent establishment. registered as a Category-I Foreign Portfolio Investor (FPI). Depending on the business model, non- resident e-commerce operators would The amendments are effective from FY need to evaluate applicability of the 2021-22. above amendments. . Clarifications regarding exemption in The amendment is effective from FY relation to aircraft leasing business 2020-21. o The Finance Bill had proposed to . Definition of ‘liable to tax’ rationalized insert a new sub-section 10(4F) to exempt royalty income earned by The Finance Bill had proposed to a non-resident, on lease of an define the expression ‘liable to tax’, aircraft to an IFSC unit subject to whereby ‘liable to tax’ in relation to a conditions, including that the IFSC person means that there is a liability of unit is eligible to claim deduction tax on that person under the applicable under section 80LA of the IT Act law of any country and includes a case for such year. The Finance Act has where after the imposition of such tax extended the benefit of this liability, an exemption has been exemption to interest income provided. arising from lease of an aircraft to such IFSC unit, while also omitting The definition proposed by the Finance the requirement relating to the Bill did not specify the nature of tax to IFSC unit being eligible to claim be considered for this purpose, and the the deduction under section 80LA scope was wide enough to include of the IT Act. payment of any tax in any country. o Additionally, the Finance Bill had The Finance Act defines ‘liable to tax’ proposed to amend section 80LA with reference to a country and the of the IT Act to provide that any income-tax liability in such country. income arising from the transfer of an aircraft or aircraft engine, which The amendment is effective from FY was leased by an IFSC unit to a 2020-21. domestic company engaged in the business of operation of aircraft IFSC-related amendments – would be eligible for 100% deduction. The Finance Act has . Clarifications regarding exemptions / removed the condition of reliefs to investment divisions of transferring the aircraft / aircraft offshore banking units engine to a ‘domestic company engaged in the business of operation of aircraft’. o The Finance Bill had proposed to extend the capital gains tax exemption on transfer of certain The amendments are effective from FY 2021- specified securities on a 22.

THE FINANCE ACT 2021

. Expanding the scope of exemption on The Finance Bill had proposed a new relocation of foreign investment fund scheme of reassessment of income, to an IFSC under which the Assessing Officer (AO) can initiate proceedings if the AO o The Finance Bill had proposed has information which suggests that several exemptions in relation to income chargeable to tax has escaped the relocation of investments held assessment. by a foreign investment fund (Offshore Fund) to an Alternative In this regard, the Finance Act has Investment Fund (AIF) located in modified the proposals given in the an IFSC (IFSC Fund), subject to Finance Bill to the extent that – conditions. One such incentive was an exemption to a non- o The AO cannot initiate re- resident for capital gains arising assessment proceedings merely on account of transfer of shares of based on the following categories an Indian company received of survey conducted on or after 1 pursuant to a relocation, by the April 2021 – IFSC Fund, if such capital gains would have not been subject to (a) Survey for verifying that tax tax in India, had such relocation has been deducted or not taken place. Notably, an IFSC collected at source in Fund registered as Category-III accordance with provisions of AIF is taxed on the capital gains in the IT Act; own hands itself as it does not enjoy a pass-through status. (b) Survey related to expenditure incurred by an asssessee in o The Finance Act has extended the connection with any function, benefit of such capital gains ceremony or event. exemption to Category-III AIFs located in an IFSC in respect of o As against a plain ‘requisition’ as such proportion of income which proposed in the Finance Bill, it is attributable to units held by shall be deemed that the non-resident (except where the Assessing Officer has the non-resident has a permanent information which suggests that establishment in India), to be some income has escaped the computed in a manner to be assessment, only in cases relating prescribed by the Government. to requisition of books of accounts, documents or jewellery, o Further, the Finance Act allows bullion or other valuable article or capital gains exemption even in thing under section 132 or section relation to shares of an Indian 133A the IT Act. company which are transferred by a wholly owned special purpose . Increase in threshold limit for vehicle of the Offshore Fund on applicability of tax audit relocation. Earlier, a taxpayer carrying on a The amendments are effective from FY business was required obtain a tax 2021-22. audit report only if total sales / turnover / gross receipts from such Amendments related to business exceeds INR 50 million assessment and procedural provided the total receipts / payments in cash do not exceed 5 per cent of the provisions – total receipts / payments of the business. The Finance Bill 2021 had . Reassessment provisions further proposed to increase this limit of INR amended 50 million to 100 million.

THE FINANCE ACT 2021

The Finance Act also provides that (MAT) pursuant to an APA or secondary receipt / payment by way of non- adjustment and accordingly, a taxpayer would account payee cheque / bank draft have to evaluate its eligibility by weighing in shall be deemed to be receipt / such additional conditions at the time of payment in cash. Accordingly, receipt / making application for any book profits payments by way of non-account adjustments. payee cheque / bank draft would be included while computing the limit of 5 The introduction of the concept of deemed fair per cent for applicability of higher value as sale consideration in slump sale cases threshold for tax audit. is a surprise insertion though – this provision would certainly change the rules of the game COMMENTS: for several ongoing business transfer deals.

Having said that, the Finance Act contains Most of the Finance Act amendments clarify or several substantive amendments with a rationalize the proposals of the Finance Bill. retroactive effect from 1 April 2020, for Through amendments introduced at the example, widening the slump sale construct to enactment stage, the Government has taken include slump exchange, deemed fair market cognizance of suggestions of various value as sale consideration for slump sale, stakeholders. Several amendments on tax expansion of equalisation levy provisions, tax regime concerning IFSC, in the Finance Bill as on dissolution/reconstitution of firms. A well as enactment stage, demonstrate the prospective application of such provisions was Government’s steadfast intent to make IFSCs certainly desirable. Alternatively, taxpayers more attractive than ever before. Further, the should have been granted specific relief from Finance Act has inserted certain additional delay in deposit of advance tax on account of conditions for re-computation of book profits the same.

− Vinita Krishnan (Director), Jimmy Bhatt (Principal Associate), Avin Jain (Senior Associate), Jugal Mundra (Associate) and Milind Hasrajani (Associate)

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