Income Tax Structure Change: The Finance Bill Of 2023

KEY TAKEAWAYS

• An income tax is a tax that governments impose on people and businesses based on their profits throughout a fiscal year. There are two types of taxes: direct taxes and indirect taxes. Income tax is the amount withheld from any source of income, with some restrictions, such as a month's salary.
• India's first income tax law was enacted in 1860 and was intended to be in effect for just five years.
• The Finance Minister of India unveiled India's 2023-24 budget on 1 February 2023, with tax measures proposed to encourage investment. The new income tax slabs tax system has replaced the former five tax slabs with six. The Finance Act is updated each year and is broken down into four parts. The most important data in this book is the changes to income tax rates, criteria for calculating agricultural revenue, government announcements, circulars, and legal rulings.
• Nirmala Sitharaman (FM) introduced changes to the Finance Bill 2023, including a refund for people with taxable income up to INR 7 lakhs, a taxpayer-friendly marginal relief provision, and revisions to the 2021 legislation.

INTRODUCTION

Income tax is a term used to describe the kind of tax that governments impose on the income that people and businesses within their area of authority make. The government imposes income tax on people and companies based on their profits throughout a fiscal year. Individual and corporate taxes are both considered sources of revenue for the government.

The government spends this money on healthcare, education, healthcare development, land and agricultural subsidies, and a number of other government welfare programs.

There are two kinds of taxes: direct taxes and indirect taxes. Direct taxes are the ones that are charged on earned income. A great example of a direct tax is the income tax.

An indirect tax, on the other hand, is imposed by the government on a taxpayer in exchange for products and services. 

Income tax is the amount withheld from any source of income, with some restrictions, since it is withheld from income tax is a term used to describe the kind of tax that governments impose on the income that people and businesses within their area of authority make in a month's salary.

For people who get monthly, quarterly, or annual annuities, it is additionally subtracted from the amount invested through a retirement or savings plan. Furthermore, money earned by renting out one's own property to a tenant is taxed under ITA standards. Mutual funds, real estate, and other market-linked investments are all taxed. The policyholder's interest earned on specified instruments such as regular deposits or fixed deposits is likewise taxable. Income tax, on the other hand, is also deductible if a person works as a business proprietor, employee, or freelancer.

A BRIEF HISTORY

India's first income tax law was enacted in 1860 and was intended to be in effect for just five years. It includes agricultural revenue from the property with rental values over Rs. 600 per year. In 1867, the levy was reinstated as a "license tax" on crafts and professions based on yearly revenue. The abolition of income tax in 1873 was a result of the recovery of the economy during that year. The Act of 1877 restored direct taxes in response to the devastating famine of 1876–1878.

The Act II of 1886 was the first major tipping point in the history of income tax in India, and its fundamental structure is still in place today. The Super-tax Act, of 1917, which imposed the super-tax, was subsequently repealed by the Super-tax Act, of 1920. The Indian Income-tax Statute, 1922, a combined statute, replaced the two acts which levied income tax and super tax. 1918 marked the second major turning point in India's taxation history. Act VII of 1918 established the idea of calculating the rate by adding revenue from all sources.

The All India Income Tax Committee's recommendations led to the creation of the Indian Income Tax Act, of 1922 (XI of 1922). The ruling party felt the need for money with the arrival of political independence in 1947, and the 1922 Act was an oddly compact piece of law due to too many modifications and revisions. After consideration by the Law Commission and the Direct Taxes Administration Enquiry Committee, the Income-tax Bill, 1961—and ultimately the Income-tax Act, 1961—was created.

India has a progressive income tax system, which means that when a taxpayer's income rises, their tax rate does as well.

There were four income tax brackets as of 2021, each with a unique tax rate. There wasn't any tax obligation for those making up to Rs. 2.5 lakh each year. The tax rate used to be 5% for yearly income between Rs. 2.5 lakh and Rs. 5 lakhs, 20% for income between Rs. 5 lakh and Rs. 10 lakhs annually. It was 30% for yearly income beyond Rs. 10 lakhs. In addition to these slabs, previously the surcharge for individuals earning more than Rs. 50 lakh per year, ranged from 10% to 37%, with a health and education cess of 4% on the total tax liability

The fundamental exemption threshold for those under 60 was Rs 2.5 lakh. The basic income exemption ceiling - Rs. 3 lakh for senior adults (60 years of age and older but under 80 years of age). The basic income exemption ceiling for super elderly folks (those 80 years of age and older) being Rs 5 lakh. Regardless of age, the basic income exemption ceiling for non-residents would be Rs. 2.5 lakh.

Income Tax Laws and Rules

1) On April 1, 1962, the Income Tax Rules of 1962, a supplement to the Income Tax Act of 1961, went into force. The Central Board of Direct Taxes (CBDT) has the authority to amend the Income Tax Laws. 

2)The Finance Act is a piece of legislation that is updated each year and is broken down into four parts: 

Part I establishes the income tax rate that will be applied to various income categories throughout a fiscal year 

Part II establishes the tax rate that must be withheld at the source, and Part III establishes the maximum limit on the House Rent Allowance.

The changes to income tax rates, the criteria for calculating agricultural revenue, government announcements, circulars published by the Central Board of Direct Taxes (CBDT), and legal rulings handed down by the Supreme Court, High Court, and Tribunals are the most important data in this book. The Income Tax Act is made clearer by these details, which also offer significant answers in the event of a dispute over the Income Tax Rules of 1961.

THE CURRENT SCENARIO

The Finance Minister unveiled India's 2023-24 budget on 1 February 2023, with some tax measures proposed in the Finance Act aimed at encouraging global investment in the country. The tax structure has undergone significant modifications under the new income tax slabs tax system. For instance, the former five tax slabs have been substituted with six in the new tax regime. The exemption from taxation limit has also been raised to Rs. 3 lakhs. These modifications will take effect from April 1, 2023. The revised slab structure looks like this:

INCOME SLABS (In INR)    RENEWED TAX RATES       

0 – 3 lakhs    Nil       

3 lakhs – 6 lakhs    5%       

6 lakhs- 9 lakhs    10%       

9 lakhs – 12 lakhs    15%       

12 lakhs – 15 lakhs    20%       

15 lakhs and above    30%     

The new tax code for salaried people includes a basic deduction of Rs. 50,000. For those making more than Rs 5 crore, the maximum surcharge under the new tax system has been decreased from 37% to 25%. Their tax rate is reduced as a result from 42.74% to 39%.

The maximum amount of leave that can be redeemed by non-government workers has been raised from Rs. 3 lakhs to Rs. 25 lakhs.

For the fiscal years 2023–2024, the government changed the surcharge rate. According to the new tax regime, the surcharge rate has changed to:

Taxable earnings beyond 50 lakhs - 10%

15% of taxable income beyond one crore rupees

25% of taxable income beyond two crore rupees

The withholding tax rate for royalties and FTS earned by non-residents/foreign corporations was increased. With the modifications, the tax rate on royalties and FTS increased from 10.92% to 21.84% (with surcharge and cess) commencing April 1, 2023. This move is intended to increase the use of tax treaty advantages by non-residents and foreign firms, as treaty rates are now more beneficial to them.  

When India enters into a double taxation avoidance agreement (DTAA) with another nation, the terms of the Act apply only if they are favorable, according to Indian tax laws. As a result, if the DTAA provisions are more favorable than the Act requirements, they will take priority. Many of India's Tax Treaties with countries such as the USA of America, the United Kingdom, and others currently levy a tax rate of fifteen percent on Royalty and FTS. Furthermore, various treaties with nations such as Germany, the city of Singapore, and France provide for an additional ten percent tax rate.

AMENDMENTS IN SECTIONS

(i) Modification of section (A) in section 115BAC of the Income Tax Act, applicable as of the 1st day of April 2024. (a) The words "and Hindu undivided family" shall be substituted with ", Hindu complete family and others" in a marginal heading; (b) the words "1st day of April 2021 but before the 1st day of the month of April 2024" will be substituted for the words "1st day of April 2021" in sub-section (1); and (c) the following sub-section shall be inserted after sub-section (1), namely:

(1A) In spite of anything in this Act, but subject to the provisions of this Chapter, the income tax payable in respect of the total income of a person, being a Hindu undivided family, an association of people (other than a co-operative society), or a body of people, whether or not it is incorporated, or an artificial juridical person referred to in clause (31) of section 2 subclause (vii), other than a person who has exercised an option undeclared for any prior year that is relevant to the assessment year starting on or after April 1, 2024, should be computed at the tax rate specified as :

(Income) 1. Upto Rs.3 lakhs - Nil 2. From Rs.3 lakhs to Rs.6lakhs- 5 percent. 3. From Rs.6lakhs to Rs.9 lakhs -10 percent. 4. From Rs.9lakhs to Rs.12lakhs -15 percent. 5. From Rs.12lakhsto Rs.15lakhs-20 %. 6. Above Rs.15lakhs -30 %

(ii)Section 194B of the Income-tax Act provides that anyone paying any person any income from winnings from any online game during the financial year shall subtract income tax on the net winnings in his user account, calculated in the manner prescribed, at the end of the financial year at the rates in use. The person responsible for paying must make sure that tax has been paid in respect of the net winnings if the net winnings are entirely in kind, partially in cash, and partially in kind, but the portion in cash is insufficient to satisfy the obligation to deduct tax in respect of the entire net winnings. If any difficulty arises in giving effect to the provisions of this section, the Board may issue guidelines for the purposes of removing the difficulty. Guidelines issued by the Board under sub-section (3) shall be laid before each House of Parliament and shall be binding on the income-tax authorities and on the person liable to deduct income tax.

CUSTOMS AND GST MODIFICATIONS

64 statutory adjustments, including ones to the Central Goods and Service Tax Act, the Integrated Goods and Service Tax Act of 2017 etc. were included in the Finance Bill 2023 that the Lok Sabha passed. 

1) The inclusion of Section 65A to the Customs Act, which imposes an extra requirement on the person assessed for commodities in regard to which any manufacturing process or other activities are carried out, was one of the significant revisions. With the authority of the Principal Commissioner of Customs or Commissioner of Customs, it allows the owner of any products that are being stored to conduct any manufacturing process or other operations there.

2) A number of amendments to the GST Act are proposed in the Finance Bill 2023, including lowering the compounding percentage from 50 to 150 percent of the tax amount to 25 to 100 percent, increasing the GST prosecution threshold from one crore to two crores, decriminalizing CGST offenses, and allowing filing returns and statements three years after the due date. Additionally, it suggests changing the explanation to Section 17(3) of the CGST Act 2017 so that the value of such transactions is taken into account when calculating the value of an exempt supply and modifying Section 17(5) to state that an input tax credit is not available for a taxable person who receives goods or services, or both, that are used or intended to be used for activities related to his social responsibility for businesses as outlined in Section 135 of the 2013 Companies Act.

IMPACT ON THE TAXPAYER

Similar to how bank deposits are taxed in India, the government has suggested a taxation scheme for debt funds with less than or equal to 35% invested in equity shares. It also suggested a similar taxing strategy for the proceeds of insurance products (savings), under which yearly premiums exceeding Rs 5 lakh will be subject to tax from March 31. Individuals who earn slightly more than the Rs 7 lakh no-tax threshold will only be taxed on the difference in income. Non-Indians from countries with whom India doesn’t have a tax treaty, will have to pay 20% on income from royalties (as compared to 10% for treaty holders) The finance minister also suggested creating a committee to investigate the pension issue and develop a strategy that would fulfill the needs of the employees while upholding budgetary responsibility to safeguard the average person.

CONCLUSION

Nirmala Sitharaman, who was introducing changes to the Finance Bill, stated: "It has been alleged that payments made for international trips using credit cards are not being included in the Liberalized Remittance Scheme (LRS) and do not subject to tax collection at source. According to the Finance Bill 2023, people with taxable income up to INR 7 lakhs will receive a refund under the new tax system. Tax on the whole income or INR 25,000, whichever is smaller, is the refund amount. A taxpayer-friendly marginal relief provision has been included by the FBA 2023 in an effort to increase the profitability of this system. A number of advantages have been offered, including the revisions to the 2021 legislation, which are projected to provide the Indian financial services ecosystem a boost.