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They’ve Changed The Finance Bill: No EPF Changes, Startups Redefined, and Dividends Upto 10 Lakh Are Tax Free


The Ministry of Finance has released  the amendments done to the Finance bill 2016 on May 06, 2016

Most of the announcements made in finance bill 2016 have been implemented, some have been rolled back due to public out lash and some have been tweaked a little.

The major amendments are as listed below:

1. Unlisted Companies – Long Term Means Two  Years now, Not Three

The definition of long term capital asset has been changed in case of shares in unlisted companies.  Earlier the share held in an unlisted company for more than 36 months used to be considered as Long term Capital asset. But with the new amendment it has been changed to 24 months.

Long term capital gains are taxed at 20%, while short term gains are added to income. Thus with the new definition, you will be paying 20% tax on any holdings in unlisted companies for more than 2 years, as it will be considered as long term capital. Biggest impact is to VCs but nowadays, who sells in less than two years?

2. Startups Redefined as “Do Not Make 25 cr.”

The startups which have net turnover less than Rs 25 Cr beginning from 01 April 2016 to 31 March  2021. Startups will also include Limited liability partnerships (LLPs) and not just public companies.

What this means

During the 2016 budget session it was announced by finance minister that their will be 100% tax exemption for startup’s for three years out of initial five years.  But it was not defined what kind of start up, Even Mukesh Ambani’s Reliance Jio venture with an investment of  1.5 trillion could have been considered as a start up. But now they have made a guideline. The startup net revenue if its less than Rs 25 Cr (Even with Limited Liability partnership), then its eligible for 100% tax exemption for three years out of the initial five years depending on the option taken by the startup company.

3. 100% deductions of profits for developing and building housing projects.

The profits earned out of developing and building housing projects will have 100% deductions from taxable income of a company, if certain criteria are met. The changes in the criteria are

  • The minimum size of residential plot will be 30 Sq meter in metros which are within 25 km of metro and 60 sq meter for any other projects.
  • The minimum limit of the project is 1000 square meters for the projects within 25 km of metro municipal corporation and minimum of 2000 sq meters for any other projects.
  • The distance measured for municipal limits will be aerially.
  • As of now the competent authority has the power to grant the building plan approval.
  • The project should be only project on the particular land for development.

What it means

If you are developing and building a housing project, you can avail 100% deductions of profits if your project meets following criteria other than above mentioned.

  • The project approval should be taken after 1st June 2016 and on or before 31st March 2016
  • The project should be completed within 3 years time frame, with the beginning date considered the date of project approval and ending date considered the date of project completion certificate obtained.
  • Maximum 3% of the built up area will be allotted for commercial establishments.
  • Only one residential unit should be provided for a family.

5. Dividend income in excess of Rs 10 lakh to be taxed.

The income generated in the form of dividends, if greater than Rs 10 Lakh, then the excess of 10 Lakh is to be taxed.

What it means?

If an investor(individual, HUF, firm) receives dividend from his investment equivalent to say 15 lakh, then the excess 5 lakh is the taxable income.

6. Tax at 25% for newly set up domestic manufacturing companies.

Income tax at 25% at the option of domestic company, which has been setup on or after 01/03/2016 and are solely into manufacturing or production. Provided they don’t avail any tax benefits under accelerated depreciation, investment allowance or any profit linked deduction.The option needs to exercised while filing first income returns. The option once exercised cannot be changed in subsequent year.

What it means?

The newly setup company can avail the option to pay 25% tax, rather than normal 30% tax, If its purely into manufacturing sector (not even into distribution of its products) and not availing any other tax schemes (like accelerated depreciation available for renewable energy generators ).

7. Retail Sellers should collect tax at Source for sale of motor vehicle above Rs 10 Lakh.

The finance bill 2016 said that the seller of the motor vehicle exceeding Rs 10 lakh should collect a tax of 1% of the vehicle value exceeding Rs 10 lakh. It was not clear whether it is applicable for retail sales or just for vehicle manufacturers. The new amendment has also included retail sales into its bracket.

What it Means?

If you(individual/company) are selling a car for Rs 20 lakh then you need to collect an extra Rs 10000(1% of amount exceeding 10 lakh) as tax from the buyer. This is tax collected at source and has to be deposited as TDS in the PAN of the buyer.

8. Roll Back of Upper limit on Employer contribution towards Provident Fund.

The Finance bill 2016 stated that the maximum an employer contribute to the PF is Rs 1.5 Lakh/annum. Due to the public out-roar, this has been rolled back and is no more valid.

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