The impact of the Finance Bill 2022 on personal taxation.
Finance Bill 2022 (the “Bill”) proposes to provide income-tax relief for Covid-19 related medical treatment (subject to such other conditions as may be prescribed by the Central Government)
“The king must make arrangements for the populace’s Yogakshema (welfare) by discarding any laxity and managing the state in accordance with Dharma, as well as collecting taxes in accordance with Dharma.” – Shanti ParvaAdhyaya, Shanti ParvaAdhyaya, Shanti ParvaAdhyaya, Shanti ParvaAdhyaya, Shanti ParvaAdh
The Finance Minister started Part B of her Budget speech with the above verse from the Mahabharata. In keeping with the spirit of the exposition verse, the Finance Bill did not dole-out any popular tax benefits such an overall reduction in marginal tax rates or increase in the limit of standard deduction.
However, it proposed several measures to simplify and rationalise the existing provisions to the personal taxation front which go a long way towards welfare of the public at large.
In line with the press statement of the government dated 25.06.2021, where relief from income-tax was promised in respect of medical treatment of Covid-19 induced illness, the Finance Bill 2022 (the “Bill”) proposes to provide income-tax relief for Covid-19 related medical treatment (subject to such other conditions as may be prescribed by the Central Government) as discussed below.
Regarding medical treatment of any person or his family member for any Covid-19 related illness:
• Any sum paid by employer for expenditure actually incurred by the employee will not be treated as a taxable perquisite; and
• Any payment received by an individual from any person to cover his or his family’s Covid-19 related medical expenses will not be taxed.
Any amounts received by the family of a deceased employee, who passed away because of any illness related to Covid-19, from his employer within 12 months of his passing, will be tax exempt. Any such payments received from any person (other than the employer) will also be tax exempt subject to a cap of Rs 10 lakh.
Further, the Bill also seeks to rationalise provisions of Section 80DD of the Income-tax Act, 1961 (“Act”), in order to provide relief from genuine hardships faced by disabled dependents and their family. Previously, the amount paid by a taxpayer under a scheme to an insurer for maintaining a disabled dependent was tax deductible, subject to the condition that the scheme provided for payment of annuity or lump-sum amount to the disabled dependent upon death of the taxpayer.
The Bill now proposes to permit such deduction even in cases where the scheme provides for payment of sum to the disabled dependent during the lifetime of taxpayer (i.e., upon attaining the age of 60 years) and upon discontinuance of the payment or deposit to such scheme. Additionally, any such lump-sum or annuity received by the disabled dependent during his lifetime will not be taxable in the hands of the taxpayer.
The Finance Bill also proposes to cap the surcharge applicable on transfer of long term assets to 15 per cent which hitherto went up to 25 per cent (in case total income was in excess of Rs 2 crore and up to Rs 5 crore) and 37 per cent (in case total income was in excess of Rs 5 crore).
State governments were allowed the option to raise the National Pension Scheme (NPS) contribution towards their employees from 10 per cent to 14 per cent on their own volition with effect from April 1, 2019. However, the tax deduction in respect of employer’s contribution towards NPS under section 80CCD of the Act was restricted to 10 per cent (and 14 per cent for Central Government employees). This limit is proposed to be raised to 14 per cent retrospectively from April 1, 2020 to ensure that state government employees get full deduction of the enhanced contribution made by their employer.
In the spirit of promoting voluntary compliance and reducing litigation, the Bill proposes to provide taxpayers an opportunity to file an ‘updated tax return’ within 24 months from the end of the relevant assessment year (AY) subject to payment of an ‘additional tax’ and interest, irrespective of whether they have filed an earlier tax return or not.
The additional tax would be computed as 25 per cent or 50 per cent of the applicable amount of tax and interest, depending on whether the updated tax return is filed within 12 months or 24 months from the end of the relevant AY, respectively.
However, the opportunity to file an updated tax return will not be provided to taxpayers in whose cases a search or survey operation has been initiated or notice has been issued to the effect the books of account or documents seized in the case of any other person belong to such taxpayers, or where the tax department has information in respect of Prevention of Money Laundering Act, 2002 or Black Money (Undisclosed Foreign Income and Asset) and Imposition of Tax Act, 2015, etc.
As such, while the Bill failed to create excitement in the vox populi, the intention of the Bill to ensure welfare measures to taxpayers affected due to the pandemic and invoke voluntary compliance to reduce and manage tax assessments in the country are commendable steps. Further, by not reshuffling the existing tax regime the Bill induces certainty which should complement the Government’s overall objective of widening the tax net and ensure self compliance.
(Gouri Puri is Partner and Suyash Sinha is Principal Associate, Shardul Amarchand Mangaldas & Co)