The Indian Parliament has passed the Finance Act (No. 2), 2019 (‘2019 Finance Act’) during July 2019 as income tax amendments and has received the assent of the President of India on 1 August 2019. Various provisions part of the 2019 Finance Act is applicable retrospectively from 1 April 2019.
However, certain provisions pertaining to procedural aspects and compliances like Tax Deducted at Source (‘TDS’) were proposed to be made effective from 1 September 2019. Let us now look at some of the amendments effective from 1 September 2019.
List of Income tax amendments
There are many income tax amendments that has been introduced by the government, some of which were applicable from 1st April and the remaining were applicable from 1st September. Few of the income tax amendments applicable from 1st September are-
1. Section 194IA – TDS on incidental payments towards property purchases
Erstwhile provisions: Any payments made towards consideration for the purchase of immovable property to the transferor of the property exceeding INR 50 lakhs are subject to TDS @ 1% of the value of consideration.
Amended provisions: The scope of ‘consideration on transfer of immovable property’ has been extended to include any other charges paid by buyers like a club membership fee, car parking fee, electricity and water facility fees, maintenance fee, advance fee, or any other charges of similar nature, etc., which are incidental to the transfer of immovable property. Therefore, all the incidental payments would now be subject to TDS @ 1%.
These provisions have been introduced to plug the loophole and avoid the tax losses resultant by way of changing the characterization of payments.
2. Section 194N – TDS on cash withdrawals exceeding INR 1 crores
Erstwhile provisions: None
Amended provisions: A new Section 194N has been introduced. All cash withdrawals from one or multiple bank accounts aggregating to INR 1 crores in a financial year would be subject to TDS @ 2% of the aggregate amount withdrawn. The provisions are applicable based on the concept of one permanent Account Number (PAN) – the limit would apply across multiple bank accounts linked to the same PAN in a Schedule bank, Co-operative bank, or a Post Office.
These provisions have been introduced with the objective of discouraging high-value withdrawals and promote a cashless economy.
3. Section 194M – TDS on payments made to contractors and professionals
Erstwhile provisions: None
Amended provisions: A new Section 194M has been introduced. An individual or HUF (Hindu Undivided Family) making payments exceeding INR 50 lakhs in a financial year in the nature of commission/ brokerage or payments to contractors or professionals would be subject to TDS @ 5% of the amount payable. The TDS is required at the time of payment to the contractor/ professional. The provisions are applicable for Individuals or HUF who are not subject to any tax audit under the Income-tax laws.
These provisions have been introduced with the objective of expanding the tax base of contractors and professionals who are currently under the purview of taxation.
4. Section 194DA – TDS on taxable portion of life insurance maturity proceeds
Erstwhile provisions: As per Section 10 (10D), maturity proceeds from a life insurance policy are exempt from tax if the annual premium is less than 10 percent (or 20 percent in case of policies sold prior to April 2012) of the sum assured. Under section 194DA, all taxable payments made towards maturities of life insurance policies exceeding INR 1 lakh attract TDS @ 1% of the sum insured.
Amended provisions: The existing provisions of Section 194DA have been amended. TDS would now be attracted @ 5% as against 1% existing earlier. However, the base amount for the levy of TDS would be the net income (aggregate maturity proceeds received less than the aggregate insurance premium paid).
These provisions have been introduced with the objective of tax rationalization and garnering early revenues in the form of higher TDS.
5. Statement of Financial Transactions – Reporting by banks and financial institutions
Erstwhile provisions: Currently, banks and other financial institutions are required to report specified financial transactions if the amount exceeds the threshold limit for the category. These transactions were to be reported to the Income Tax Department through a Statement of Financial Transactions (SFT) required to be filed by all banks and financial institutions. In most of the reportable transactions, the floor limit has been INR 50,000.
Amended provisions: The floor limit for the reportable transactions has been done away with. Essentially, the scope of the reporting requirement for reportable transactions has been widened, thereby bringing more transactions under the purview of the reporting framework. This is additional compliance for the banks and financial institutions. However, taxpayers need to ensure that the data reported in their Income Tax returns corresponds (ITRs) to the data reported in the SFT.
These provisions have been introduced with the objective of data collection, validation, and corroboration at various levels for efficient tax administration and governance.
6. Inter-linking of PAN and Aadhar
Erstwhile provisions: Inter-linking of PAN and Aadhar was made mandatory in order to keep a check on persons holding multiple PANs and for the better social and economic administration of welfare schemes. The PANs which were not linked with Aadhar before the specified deadline was considered invalid (as if the PAN never existed). The legal validity of these provisions was also confirmed by the Hon’ble Supreme Court of India.
Amended provisions: Considering PAN as invalid meant that the validity of transactions undertaken previously would be affected. I order to grandfather the earlier transactions, PAN not linked to Aadhar would not be considered “inoperative” and not “invalid”
These provisions seek to remedy the legal validity by virtue of making the PAN invalid in case not liked with Aadhar.
7. Interchangeability of PAN and Aadhaar in reporting for prescribed transactions
Erstwhile provisions: Quoting the PAN was mandatory for prescribed transactions. These details were gathered at various levels and shared with the Income tax Department for further analysis and administration.
Amended provisions: In order to expand the scope of the reporting framework, Aadhar is permitted to be quoted in place of PAN. In cases where a person holds Aadhar but does not hold a PAN, PAN would be automatically generated and shared with the person.
These provisions seek to expand the reporting framework and facilitating ease of compliance to the taxpayers for better administration by the Income Tax Department.
Businesses should evaluate the impact of the above income tax amendments provisions on their business and personal transactions and undertake compliances wherever required. Not to mention income tax amendments like non-compliance of the compliance framework (especially TDS) attracts interest, penalties, and could also lead to prosecution.