Key amendments in Finance Bill 2023 at enactment stage

Finance Bill 2023 has been passed in the Lok Sabha today (24th March, 2023) with 64 amendments proposed to the Bill.

There are a few last-minute changes and were not originally part of the proposals during the Union Budget.

A few key amendments to the Finance Bill 2023 are as follows:

1. Increase in tax rate for Royalties and Fees for Technical Services under the Income-tax Act, 1961

The tax rate under section 115A of the Act for taxation of royalties and fees for technical services is 10%. Based on the amendment passed in the Lok Sabha, the rate is proposed to be increased to 20%. This rate will further be increased by applicable surcharge and cess.

This will result in more claim of tax treaty benefits as most international treaties provide a tax rate of 5% or 10% or 15% (which are more beneficial than the new rate of 20%). Further, tax treaty rates are not increased by surcharge and cess.

Thus, even the withholding tax rates and related compliances will increase.

The impact of this will be that the cost of importing technologies as most Indian deductors have to withhold tax on a gross-up basis.

2. Removal of indexation benefit for debt oriented mutual funds

If any mutual fund has Assets under Management (AUM) less than 35% in equity instruments, then it will be classified as a debt-oriented mutual fund.

Further, irrespective of period of holding, the income will be taxed as per slab rates without any indexation benefit (in line with the tax treatment of Fixed Deposits).

3. Income from (Real Estate Investment Trust) REITS/InvITs (Infrastructure Investment Trusts) to be taxed as Income from other sources rather than being taxed as Capital gain.

4. There has been a 25% hike in the STT (Security Transaction Tax) on options.

5. Offshore banking units operating in Gift city (Gujarat International Finance tec-city) to get 100% deduction on income for 10 years.

The Finance Bill 2023 is currently pending before the Rajya Sabha. Once it is passed by the Rajya Sabha, it shall become a law upon receiving Presidential assent.

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