This paper will serve as a brief comment on the Finance Act, 2021 focusing on the effect of the various tax schemes on the corporate sector. As indicated by the Finance Minister in her speech on the budget, the need of the hour is a tax system which places minimal burden on tax payers as the COVID-19 pandemic has taken a heavy toll on economic development.[1]

Ms. Sitharaman also stressed on the importance of a transparent and efficient tax system which focuses on promoting investment and employment, some of the key features of a good tax system. Part I of the paper will provide an overview of the Act. Part II of the paper will discuss the impact of the Act on goodwill as an asset.

Part III will analyse the changes made to the definition of “liable to tax”. Part IV will focus on amendments related to mergers and acquisitions. Part V will underscore how the scope of equalisation levy has been widened, and the impact of the same. Part VI will discuss measures related to International Financial Services Centre. Part VII will operate as the conclusion of the paper, highlighting the missed opportunities in the Act.

Introduction
In keeping with the budget proposals presented by the Finance Minister on 1 February, 2021, the Finance Bill, 2021 primarily aims at reforming the direct tax system by providing for renewed rates of income tax in some case, tax incentives, and rationalisation of various provisions. After being presented in the Lok Sabha on 1 February, 2021, the Bill was tabled and subsequently passed with over one hundred changes. These changes included curative amendments, which were absent in the original Bill.

Once the Lok Sabha made these amendments and the Bill was put before the Rajya Sabha, it was passed without further amendments and finally received Presidential assent on 28th March. Thereafter, it has culminated into the Finance Act, 2021. The Act in its final form has made an attempt to incorporate the suggestions of various stakeholders, particularly bearing in mind the impact of COVID-19 on the economy.

Goodwill As An Asset

The question of goodwill as a depreciable asset was a contentious one, which has ultimately been clarified by the Finance Act, 2021. In order to compute depreciation, the relevant block of asset must be identified and thereafter, the written-down value (“WDV”) method is used.

WDV of a block asset is defined under S.43(6)(c) of the Income Tax Act, 1961 (“the IT Act”) as the WDV aggregate of all assets falling within that block at the start of the previous year. This will then be increased by the actual cost of an asset within the block acquired during the previous year and reduced by the money payable with respect to any asset falling within that block, that has been sold, discarded, demolished, or destroyed during that previous year.

The Finance Bill proposed to remove depreciation on goodwill. To this effect, an amendment to S.2(11) of the IT Act was proposed whereby the definition of “block of asset” would not include the “goodwill of a business or profession”. The Bill also proposed that S.32(1) , Explanation 3 of the IT Act be amended to remove goodwill as an intangible asset. Further, the Bill proposed that S.32 (1)(i) be amended to make goodwill of a business or profession ineligible for depreciation.

Amendments were made to S.50 of the IT Act in the form of a proviso to sub-section(2) to provide that the CBDT has the discretion to prescribe a way of determining the WDV of a particular block asset and short term capital gain if goodwill forms part of that block of asset and depreciation has been claimed on it.

Though the Finance Bill, 2021 proposed the above-mentioned amendments with respect to goodwill, it neglected to mention the fate of S.43(6)(c) of the IT Act, which defines the WDV of any given block of assets. This created a lacuna in as much as, there was no clarity on how to compute the amount of goodwill which formed part of an existing block of assets. As explained in the section, if an asset is classified into a block, it is subject to depreciation. Hence, if an assessee acquired goodwill which formed a part of a block of assets in any previous year, it would not be possible to ascertain how depreciation would be computed on such a block of assets.[2]

The Finance Act, 2021 has amended S.43(6) of the IT Act to provide that the WDV of block of assets will be reduced as per the difference between actual cost of goodwill which comes within that block of assets and the depreciation allowable on that goodwill up to March 31, 2020. This amendment was made effective from FY 2020-2021, with a clarification that the amount of the said reduction will not exceed the WDV of that particular block of assets.[3]

Liable To Tax

The Finance Bill, 2021 also proposed an amendment to the definition of “liable to tax” as mentioned in S.2 (29A) of the IT Act. The new definition proposed to provide that the term “liable to tax”, in relation to an individual would mean that there is a liability of tax on that person under any law for the time being in force, in any country, and would also encompass a scenario where after the imposition of tax liability, an exemption has been provided under any law.

The definition proposed by the Bill did not specify the nature of tax which would be considered for such purpose. That is there was no specific reference to income tax, leading to a possible interpretation that if an individual is paying any tax, she may be regarded as liable to tax in any such country.[4] The Finance Act, 2021 removed this lacuna by providing that “liable to tax” would be read with reference to a country and the income-tax liability in such country”. This amendment was made effective from FY 2020-2021.[5]

Amendments Related To Mergers And Acquisitions

1. Calculation of Full Market Value of Capital Assets Transferred Under Slump Sale
   As per S. 2(42C) of the IT Act, the term “slump sale” refers to the transfer of one or more undertakings for lump sum consideration without the value being assigned to individual assets and liabilities. Further, S.50B of the IT Act contains the procedure for computation of capital gains in case of a slump sale.
   
   The Finance Bill, 2021 proposed a rationalisation of this provision pertaining to slump sale, as some courts had interpreted it to mean that other means of transfer of capital assets listed in S.2(47), such as relinquishment and exchange are excluded. However, the Bill sought to make the intention of the Legislature clear by amending the scope of the term “slump sale” in S.2(47) to include all types of transfer.
   
   When the Bill was amended by the Lok Sabha, it was also proposed that S.50B(2) of the IT Act be amended to provide that the fair market value (“FMV”) of capital assets being transferred through a slump sale as on the date of transfer would be calculated in a prescribed manner. The FMV would be deemed to be the full value of consideration received as a consequence of transferring such capital asset.
   
   Explanation 2 was also added to S.50 to provide that the value of any capital asset being goodwill which has not been acquired by the assessee by purchase from previous owner would be taken as nil when net worth is being computed. This amendment is effective from FY 2020-21 on slump sales undertaken during FY 2020-21.
   
   However, no valuation report has been placed on record to ascertain the FMV and whether it would be arrived at based on an itemized approach or a lumpsum approach and whether when arriving at the deemed valuation, the value of liabilities would be considered.[6]
    
2. Rationalisation of Provisions Concerning Dissolution
   The Finance Bill suggested that capital gains should be levied on partnership firms, association of persons, or body of individuals. It clarified that this would take place in case of distribution of assets to a partner/member of any of these entities in the event of dissolution. These proposed amendments were rationalised by the Finance Act, 2021 in the form of the insertion of S.9B to the IT Act, which stipulated that if a partner receives any capital asset and/or stock-in-trade from a firm when dissolution becomes effective, or upon reconstitution of the firm, the firm shall be deemed to have transferred such capital asset and/or stock-in-trade to the partner in the year of receipt of such capital asset and/or stock-in-trade.
   
   Thereafter, profits/gains made out of such a transfer will be taxable with the firm as the base as “income from business or profession” or “capital gain”, according to the concomitant provisions of the IT Act. Further, the amended provision stipulates that in order to compute profit and gains from such a deemed transfer, the FMV of the said capital asset or stock on the date on which it is received by the partner in question will be deemed to be the full value of consideration.[7]
   
   S.45(4) of the IT Act has also been amended to define the term “reconstitution” and to lay out the method of computation of capital gains in case of transfer of capital asset by a firm or association of persons or a body of individuals to its partner or member on reconstitution.
   
   S.45(4A), which was proposed in the Finance Bill, 2021 was added to provide that the transfer of a capital asset, money or any other asset to a partner/member at the time of dissolution or reconstitution of a firm/association of persons/body of individuals would be taxed as capital gains. This section was omitted in the Finance Act, 2021.
   
   Furthermore, in order to avoid a scenario of double taxation of a firm due to the combined effect of S.45(4) and S.9B, S.48 of the IT Act has also been amended to state that a reduction of gains attributable to the capital asset transferred by such a firm can be allowed when computing income under S.45(4). The method of computing such gains attributable to capital assets is said to be prescribed by the Government. These amendments will take effect from FY 2020-21.[8]
   
   This is a step in the right direction, as it avoids the issue of double taxation and is in keeping with prevailing international standards of taxation.[9]

Equalisation Levy

As on 1 April, 2020, a 2% equalisation levy was imposed on the consideration receivable by a non-resident e-commerce operator for e-commerce supply or services provided or facilitated to it by Indian residents, which would include any person using an internet protocol address located within India, and also non-residents, subject to certain conditions. This was done vide S.165A of the Finance Act, 2016 through S.153 of the Finance Act, 2020.

The Finance Act, 2021 has also clarified that such a levy would not be applicable to consideration received or receivable with respect to goods owned by a person who is a resident of India, or by a permanent establishment in India of a non-resident in India, if such a sale is effectively connected with that permanent establishment.[10]

It would also not apply to consideration for provision of services by a person who is a resident of India or by a permanent establishment situated in India which belongs to a non-resident, if such provision of services is effectively connected with that permanent establishment.[11]

Further Incentives For International Financial Services Centre (IFSC)

In keeping with its previous move of establishing Gujarat International Financial Tec-City (“GIFT City”) in 2015 as an International Financial Service Centre in 2015, the Finance Bill, 2021 proposed several measures in order to boost the IFSC. For instance, a new section, S.10(4F) has been added, which stipulates that any income by way of royalty from aircraft lease rentals paid to foreign enterprises will qualify for a tax exemption if that particular IFSC unit is eligible for tax holiday and has commenced operations on or before March 31, 2024.

The Finance Act further amended the said section, stating that income from leasing may also be in the form of interest, therefore exemption must be provided with respect to this as well as royalty. Further, the condition that an IFSC unit should be eligible for deduction under S.80LA for the previous year in which the aircraft was leased has been removed. Therefore, a non-resident would be able to claim an exemption under S.10(4F), even if an aircraft is leased to a unit of IFSC not eligible for deduction under S.80LA.[12]

An explanation has also been added to S.10(4F) to stipulate the meaning of “aircraft”. It has widened the meaning to include an aircraft, a helicopter, or an engine of either of these, or a part of these, or any part thereof.

This amendment would be applicable from AY 2022-23.[13]
A grandfathering benefit on future sales of shares of Indian companies has been extended to the specified funds in IFSCs to the extent of income attributable to the units held by a no-resident with no permanent establishment in India vide a new section, S.10(23FFF).[14]

Conclusion
The fact that several provisions in the Finance Act, 2021 have been given retrospective application is questionable, as it takes away from one of the key pillars of taxation- certainty. These retroactive amendments include the widening of the slump sale framework to include slump exchange, as well as the deeming provision for fair market value for sale consideration with respect to slump sale. Furthermore, the tax on dissolution/reconstitution of firms has also been given retrospective application, thus making the computation onerous in the absence of clear-cut guidelines for the same.

However, the Finance Act, 2021 must be appreciated for its attempt to align taxation policies with prevailing international standards, examples of this being the insertion of the equalisation levy and the IFSC boosting provisions.

End-Notes:

1. Nirmala Sitharaman, 'Budget 2021-2022' (Speech of Nirmala Sitharaman, Minister of Finance) < https://www.indiabudget.gov.in/budgetspeech.php> accessed 1 September 2021.
2. Taxmann's analysis of changes made in the Finance Bill, 2021 as passed by the Lok Sabha' [2021], < https://www.taxmann.com/post/blog/5742/taxmanns-analysis-of-changes-made-in-the-finance-bill-2021-as-passed-by-the-lok-sabha/> accessed 1 September, 2021.
3. Vinita Krishnan and others, 'The Finance Bill, 2021 Enacted After Significant Amendments', < https://www.khaitanco.com/sites/default/files/2021-04/The%20Finance%20Bill%202021%20enacted%20after%20significant%20amendments_0.pdf> accessed 3 September, 2021.
4. Taxmann's analysis' (n 1).
5. The Finance Bill, 2021 Enacted After Significant Amendments' (n 2).
6. Taxmann's analysis' (n 1).
7. Government of India, 'Memorandum Explaining the Provisions in the Finance Bill, 2021 < https://www.indiabudget.gov.in/memorandum.php> accessed 3 September 2021.
8. Amendments to the Finance Bill, 2021 as passed by both houses of the parliament' [2021] < https://www.pwc.in/assets/pdfs/services/tax/cit/pwc_news_alert_26_march_2021_amendments_to_the_finance_bill_2021_as_passed_by_both_houses_of_the_parliament.pdf> accessed 3 September 2021.
9. Richa Bakiwala and Nitish Ranjan, 'Key Amendments to the Finance Act, 2021' [2021] < https://database.taxsutra.com/articles/b4f01830bd15c4218813482102aae9/expert_article> accessed 3 September, 2021.
10. The Finance Bill, 2021 Enacted After Significant Amendments' (n 2).
11. Directorate of Income Tax, 'Equalization Levy', [2021] < https://incometaxindia.gov.in/booklets%20%20pamphlets/equalization-levy-english.pdf> accessed 4 September 2021.
12. Key Amendments to the Finance Act, 2021 (n 9)
13. Amendments to the Finance Bill, 2021 as passed by both houses of parliament' (n 8).
14. Amendments to the Finance Bill, 2021 as passed by both houses of parliament' (n 8).