FEBRUARY 02, 2021

By R Sridhar, Consulting Editor, TIOL

WHILE there is no intention to repeat what has been said in TVs and the Press, there are a few amendments where the Government has either provided clarity or has stuck to its stand. While we cannot cover all of them in this short time post the Budget, we can address a few which are interesting to note

Section 10 (10D) of the Income Tax Act - Clause 5(c)

Unit linked Insurance Plans also provides for investments in the market schemes as per a policy buyers risk appetite apart from the Life Insurance cover. The funds were getting invested in plans as per the Schemes formulated by the Insurance Company and combined with the option of the person insured. However many after the completion of policy paying period and other terms of exit used to exit the policy with the accumulated fund value. This used to be attractive as it was investment was made in markets through MFs. The investor used to withdraw from the Scheme when the exit time was opportune and made the best returns which was not taxed under section 10 (10D).

This has now been put to rest with insertion of two provisos to the section before Explanation 1 and in case premium is excess of Rs 2.50 Lakhs per annum then the same will be taxed as per Capital Gains code. The relevant amendment has also been made in section 45 by inserting section 1B to the section and this read with section 2(14) amendment forms a new code for ULIP tax. The tax of capital gains will be calculated as per prescribed guidelines. However, in case of death of the insured the same will not be taxable.

Essence or Philosophy

The Government is bound to take the approach that when there is a encashment of gain on a invested portion of a capital asset clubbed with a Life insurance policy then such gain is rightfully to be taxed under the head Capital Gains .It is interesting to note that the Government has dissected this carefully in the Explanation 3 to the section which also has been inserted in the Finance Bill.

"'Explanation 3.- For the purposes of this clause, "unit linked insurance policy" means a life insurance policy which has components of both investment and insurance and is linked to a unit as defined in clause (ee) of regulation 3 of the Insurance Regulatory and Development Authority of India (Unit Linked Insurance Products) Regulations, 2019 issued by the Insurance Regulatory and Development Authority under the Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999."

On a lighter note, we may have been not burdened with higher capital gains tax rate on Equities or MFs but a small portion of the gains made in the guise of Life Insurance Policy has been taxed. One wonders how much this will impact the future of ULIP Funds and the reaction of MFs to this news

Provident Funds Section 10(11) and 10(12) - Proposal Clause 5 (c) to the Bill

The interest accrued to account of person participating either in a Statutory provident or recognized provident fund to the extant contribution exceeds Rs 2.50 Lakhs per annum will be taxed as income. However, this will apply only in respect of the interest accruing to the extent it relates to the contribution made by the person. This amendment will apply to interest accruing in any previous year after 1 April 2021.

It is important to recall that in Finance Act 2020, the first amendment of account of contributions made by an employer in excess of 750000 per annum towards Provident Fund, Pension Fund and NPS were taxed. In a phased manner the whole concept of EEE principle of social security savings in India are being amended.

What is relevant is that in a reducing interest scenario, when recognized PFs or Statutory Funds etc. cannot make higher returns, this tax may become a burden for the skilled professionals, educated middle class employees who form a significant number of India tax paying population. While it is true that EEE concept may not be relevant to changing social conditions, the tax may affect the capability of saving potential of India middle class/upper Middle class as a portion will be taken away as tax.

What now one wonders is, what will happen to the exemption on ultimate withdrawal on attaining superannuating age with the coming budgets. Secondly the newly inserted codes provide for the computation in a manner prescribed and we will have to await these amendments. Secondly, the concerned Accounting Bodies of the PFs etc will have to maintain separate buckets of accounts and ensure that they are correctly taxed.

Amendment in the Central Sales Tax Act - Clause 141 of the Bill

Shorn of the legal façade, the amendments proposed in short take away the facility of declaration Form C for all in GST regime buying petroleum goods (outside GST regime currently and taxed under respective Sales Tax Regimes / CST regime) for purposes of manufacture of final products /goods taxable under GST. This is an important amendment, as the same will increase the cost of petroleum products (such as HSD, natural gas) procured for purposes of manufacture of final products bought on inter-state basis. While the entire issue was contested in certain High Courts, there were a few Circulars of certain States that helped in settling the issue. This sudden unannounced amendment will have a cost push depending on supply chain structures of various constituents.

With the fourth anniversary of GST around the corner, one hopes that the Government/GST Council will take a call on inclusion of Petro products under GST. In the interim, there must be some attempt to rationalize the high tax regime of tax rates across States. In May 2020, the ET published data that puts India at the highest rates on Fuel taxes in the world with a rate of 69 per cent. While there will be some changes from 2020 May till now, it is important that cost of Fuel used in production of goods for manufacturers - mainly HSD used in power generators must be moderated lest this non-creditable tax can push the costs haywire.