Tax Announcements and its Impact on Taxpayers

Written by : Knowledge Centre Team

2024-08-02

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On 1 February 2021, the Union Finance Minister of India, Nirmala Sitharaman, made tax reforms to income tax regulations. This year, the theme of the Direct Tax Strategy helped in simplification of the tax policies and eradicating financial controversies. The rich and the poor citizens of the country are affected by the implementation of new policies alike. Let us see how the taxpayers and the economy of the country will be impacted by the budget 2021 tax slab.

Relief to senior citizens from filing the income tax return

In order to relieve the pressure of enforcement on elderly pensioners who are 75 years of age or older, the budget 2021 announcements proposed to exclude them from the obligation of filing income tax returns where the maximum amount of tax payable has been withheld by the paying bank. This exemption is proposed to be made applicable to senior citizens who have only interest income in addition to pension income.

Reduction of time constraints for reopening the assessment

In order to minimize the cost of compliance, the time period for the reopening of the review is shortened to 3 years from the existing 6 years from the completion of the applicable assessment year. Reopening up to 10 years is proposed to be permitted only if there is proof of undisclosed profits of Rs. 50 lakh or more for a year.

It is proposed that the reopening of the scheme should be completely eliminated on the grounds of data analytics, objections from C&AG, and search/survey situations. In order to add clarity to the income tax system at the earliest opportunity, the time limits for the general appraisal or preparation of the income tax return is shortened by three months.

Dividend relief

In order to give relief to taxpayers, an advance tax obligation on dividend income shall be paid only after the declaration/payment of the dividend has been made. The dividend paid to Real Estate Infrastructure Trusts or Infrastructure Investment Trusts (REIT/InvIT) is excluded from TDS.

It is also proposed to explain that the exclusion of income tax, including dividend income to international portfolio holders, may be made at the treaty rate. Dividend distributions from the Minimum Alternate Tax or MAT levy for international firms are also excluded if the effective tax rate is smaller than the MAT rate.

Setting up a conflict resolution board

In order to minimize lawsuits and stimulate dispute settlement for small taxpayers, a Dispute Resolution Committee is proposed to be set up. A taxpayer with a taxable income of up to '50 lakh and a contested income of up to '10 lakh shall be entitled to approach the Commission. The Settlement Committee shall also be discontinued from 1 February 2021. However, the outstanding cases shall be determined by the Temporary Commission if the claimant so wishes.

Faceless income tax review tribunal

In order to provide a straightforward process for tax appeals, it is proposed to make the Income Tax Appeal Tribunal faceless and without jurisdiction. A National Faceless Income Tax Appeal Tribunal Center shall be formed, and all correspondence between the Tribunal and the claimant shall be rendered by electronic means.

Promotion of the transfer of the UCB to the SFB

In order to promote the transfer of Urban Cooperative Banks (UCBs) to Small Finance Banks (SFBs), the provision of tax neutrality for the transition from UCBs to SFBs has been announced. The UCB need not pay capital gains on the properties passed to the SFBs.

Tax credits for social construction

In order to promote the purchasing of an affordable house, the qualifying date for the argument of an additional interest deduction of 1.5 lakh paid for the loan taken for the purchase of an affordable house be extended to 31 March 2022.

In order to expand the availability of affordable housing, the qualifying period for tax holidays for affordable housing initiatives will be increased by one more year to 31 March 2022. Tax exemption for the notified Affordable Rental Housing Initiatives is proposed to be allowed.

Tax benefit for Start-ups

In order to encourage the development of start-ups in the nation, the budget 2021 tax slab proposed to expand the qualifying period for start-up tax holidays by one more year to 31 March 2022. It is planned to increase the qualifying period for capital gains exemption for start-up investment by one more year to 31st Match, 2022.

NRI comfort for retirement benefit salary account

In order to address the actual difficulties encountered by the NRIs in terms of their income earned on the foreign retirement benefits account due to tax mismatch, it is recommended to inform the guidelines for aligning the taxation of income on the foreign retirement benefits account.

Exemption from auditing

In order to promote digital transactions and reduce the burden of compliance of those who carry out almost all of their transactions digitally, it is proposed to raise the tax audit threshold for individuals who are conducting 95 percent of their transactions digitally from 5 crores to 10 crores.

Tax rationalization of Unit Linked Insurance Plans (ULIP)

In order to rationalize the taxation of ULIP, it is suggested to allow the tax exemption for the maturity of the ULIP with an annual premium of up to 2.5 lakh. However, the balance earned on death remains exempt without any restriction on the annual premium.

The cap of 2.5 lakh on the annual ULIP premium shall apply only to policies adopted on or after 1 February 2021. Additionally, the same concessional capital gains tax regime as the mutual fund is given to the non-exempt ULIP.

Rationalization of the tax-free revenue of the provident funds

The interest income earned on the contribution of employees to the employee provident funds with the annual contribution of 2.5 lakh or more is now taxable. This restriction shall apply only to the contribution made on or after 1 April 2021.

Savings for limited trusts

In order to reduce the burden of compliance on small charitable trusts operating educational institutions and hospitals, it is proposed to raise the cap on annual receipts for these trusts from the existing '1 crore to '5 crores for non-applicability of different compliances, such as permissions, etc.

Relaxation in the exemption conditions to SWF/PF

In order to encourage more SWF/PF to invest in Indian infrastructure, it is proposed to relax some of the conditions for the 100% tax exemption introduced in the last budget. The conditions expected to be eased the ban on borrowing or leasing, limits on economic practices, direct investment in infrastructure holders, etc.

Reforms for non-filing of tax

In order to prevent the habit of not filing returns by individuals, the union budget has announced new reforms that will charge the taxpayer in the absence of ITR filing. If a return of profits has not been filed, the rate of TDS/TCS shall be at twice the rate stated or 5%, whichever is greater. This rule shall not extend to purchases where the entire amount of tax is expected to be withheld, e.g., wage revenue, non-resident payment, lottery, etc.

Impact of new laws on the taxpayers

The new modifications in the tax announcement have created a buzz across the nation. Prime Minister Narendra Modi has described the new rules as a well-rounded development for the country. Nirmala Sitharaman has announced a new beginning for the textile industry, an increase in the customs duty levied upon cotton and raw silk cultivation. Quite different from the standard practice, this year's tax announcement was made available in the digital format only and not printed.

The tax rates were not increased in accordance with the previous years, but the ministry failed to address the requests of taxpayers for higher investment limits and medical costs.
Moreover, the recent tax announcement made it problematic for taxpayers in financing investment areas like the limitations of deductions for ULIP and the contractor's fund.
Finally, the government has remarked on working for the citizens by relaxing stamp duty, streamlining travel leave concessions, and exemptions from the return filling.
The Budget 2021 tax slab concerned unit-linked insurance plans (ULIP), pre-filled income tax return (ITR) forms, directive principles tax deduction (TDS) for non-filers with income tax returns, and TDS allowance for dividends paid to REIT/InvIT, which were proposed to support the finances of the working class.

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