Finance Bill passed. Lok Sabha passes Finance Bill 2023 after Minister moves over 60 amendments

The Finance Minister on Friday announced in the Lok Sabha that a committee under Finance Secretary T. V. Somanathan will be set up to look into further improvements in the National Pension System (NPS) for government employees. 

“Representation have been received that NPS for government employees needs to be improved. I propose to set up a committee under Finance Secretary to look into this issue of pension and evolve an approach that addresses the needs of employees, while maintaining fiscal prudence to protect the common citizens. The approach will be designed for adoption by Centre and the States,” Sitharaman said in the Lok Sabha before moving the Finance Bill 2023 for consideration and passage of the Lower House.

Budget 2023: What did the Centre amend in the finance bill?

She also said RBI is being requested to bring payments for foreign tours through credit cards within the ambit of the Liberalised Remittance Scheme (LRS) and, accordingly, be subjected to tax collection at source.

The Lok Sabha later passed the Finance Bill 2023 after the Finance Minister moved over 60 amendments to the Bill.

Sitharaman also highlighted the setting up of GST Appellate Tribunal as one of the important interventions of the Central Government through the latest amendments to the Finance Bill 2023.

As part of the amendments, the Centre has also hiked by up to 25 per cent the securities transaction tax (STT) on options as well as futures trades put through the stock exchanges.

Debt mutual funds

If there is one amendment that became a hot topic of discussion for mutual fund investors and taxation experts, it was the one related to taxing investments in debt mutual funds as short-term capital gains and removal of indexation benefits for such funds.

The amendments proposed have removed long-term capital gains treatment with indexation benefits for debt mutual funds. 

This is significant as the tax treatment change could benefit bank deposits, which have been growing more slowly than credit demand over the past 12 months, leading to higher funding costs for the banks.

The Finance Bill is proposed to be amended to provide that investments in mutual funds where not more than 35 per cent is invested in equity shares of an Indian company i.e. debt funds, will now be deemed to be short-term capital gains. The proposal will be applicable to investments made on or after April 1, 2023. Also, debt funds held for more than three years will no longer enjoy indexation benefit.

Currently, debt fund investors pay tax according to their tax slab, if the holding is less than 36 months. For over three years, a 20 per cent tax is applicable with indexation benefit, or 10 per cent without indexation benefit.

Economy watchers and experts noted that this change in tax treatment for debt funds will bring fixed deposits on a par with debt mutual funds. Indexation benefit was one of they key benefits of investing in debt funds, and this was not available for fixed deposits.

“I hope the proposed change in the Finance Bill to remove LTCG with indexation status on debt funds is reviewed. Financialisation is just happening in India and a vibrant corporate bond market needs a strong debt MF ecosystem,” Radhika Gupta, MD & CEO of Edelweiss Mutual Fund tweeted.

GST Appellate Tribunal  

The amendments to the Finance Bill 2023 also paves the way for setting up of a GST Appellate Tribunal (GSTAT) with one Principal Bench and a number of state benches. This is expected to help businesses resolve various disputes in a better manner.

Abhishek Jain, Tax Partner, KPMG said: “The recommendations of the GST Council pertaining to setting up of GST Tribunal have been duly incorporated in the Finance Bill 2023, by way of amendment. Given these developments, it seems that the GST Tribunal will see the light of the day sooner than later. This will bring to an end a long wait for the industry and help streamline pending litigations”

Saurabh Agarwal, Tax Partner, EY said the amendments proposed in Section 109 of the CGST Act would not only help the Government in setting up of GST tribunals in a time-bound manner, but would also enable the Principle Bench to take certain important decisions such as distribution of cases amongst the State benches, referring of case to other members in case of difference in views within the same bench or otherwise, etc. This would help in streamlining the litigation process.

Further, on the vexed issue of Place of Supply, the power to hear the appeal would vest with the Principal Bench, which is likely to aid in better decision-making.  

Tax booster for IFSC

Several significant changes have been brought about which can be termed as “last mile” changes to remove remaining bottlenecks in the International Financial Services Centres (Only Gift City in Gujarat for now). 

One major change relates to the aircraft leasing industry. While most of the exemptions required  by foreign investors and aircraft lessors are in place in terms of exemption for royalty and interest income, now the exemption also gets expanded to capital gains and dividend received by a company in IFSC, which leases an aircraft through a step-down Special Purpose Vehicle, explained Sunil Gidwani, Partner, Nangia Andersen LLP.

Further tax holiday for banking units in IFSC has been extended from 100 per cent in first 5 years and 50 per cent in next the five years to 100 per cent for the entire 10-year period. 

Also any bonds issued by an IFSC unit and listed on an exchange there will enjoy a lower withholding tax of 9 per cent. “These measures will make IFSC difficult to ignore for any large financial markets player,” Gidwani added.

REITs and INVITs

The Finance Bill 2023 had sought to tax any distribution made by a business trust (REITs/INVITs) other than interest, dividend, rental income or capital gains, that is to say, any distribution which was not taxable either in the hands of the business trust or unit holders, as income of unit holders as ‘income from other sources’. 

In other words, the government sought to levy tax on any form of distribution which was christened as ‘repayment of debt’ and/ or ‘amortisation of debt’ in the hands of the investor irrespective if the initial investment was not fully recouped.

Vishwas Panjiar, Partner, Nangia Andersen LLP said the government has taken a pragmatic and more sensible approach to the issue of taxability in such cases. “It has now proposed that only the sum received in excess of the initial investment will be taxed as “Income from Other Sources”. Also, the sum received will compulsorily reduce the cost base of the unit for the purpose of computing capital gains tax at the time when the unit holder ultimately sells the unit,” Panjiar added.

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