Rationalisation of certain provisions of Income Tax Act

The Budget 2025 introduces several key amendments to the Income Tax Act, focusing on rationalizing tax provisions to improve compliance, reduce litigation, and support economic growth. The proposals include streamlining penalty timelines, clarifying stay periods in tax proceedings, and introducing a block-period approach for transfer pricing assessments. Additionally, amendments have been made to ease business operations, such as expanding the scope of safe harbour rules, simplifying carry-forward of losses in mergers, and extending tax benefits to inland vessels and International Financial Services Centre (IFSC) entities. Other significant changes include harmonizing the Significant Economic Presence (SEP) rules, revising capital gains tax rates for non-residents, and introducing tax certainty for electronics manufacturing.

Time limit to impose penalties rationalised

It is proposed to amend section 275 of the Act to provide that any order imposing a penalty under Chapter XXI shall not be passed after the expiry of six months from the end of the quarter in which the connected proceedings are completed, or the order of appeal is received by the jurisdictional Principal Commissioner or Commissioner, or the order of revision is passed, or the notice for imposition of penalty is issued, as the case maybe. Consequential amendment is also proposed in section 246A of the Act to update reference of the amended section 275 of the Act.

Clarification regarding the commencement date and the end date of the period stayed by the Court

Section 144BA, section 153, section 153B, section 158BE, section 158BFA, section 263, section 264 and Rule 68B of Schedule-II of the Act, inter-alia, provide that period during which the proceedings under respective provisions are stayed by an order or injunction of any court shall be excluded in computing the time limit for conclusion of the proceedings.

With a view to removing any ambiguity, it is proposed to amend the said provisions of the Act so as to exclude the period commencing on the date on which stay was granted by an order or injunction of any court and ending on the date on which certified copy of the order vacating the stay was received by the jurisdictional Principal Commissioner or Commissioner.

Ease of doing business

• To streamline the process of transfer pricing and to provide an alternative to yearly examination, it is proposed to introduce a scheme for determining arm's length price of international transaction for a block period of three years. This will be in line with global best practices.
• With a view to reduce litigation and provide certainty in international taxation, the scope of safe harbour rules is being expanded.   

Rationalisation of provisions related to carry forward of losses in case of amalgamation

Section 72A and 72AA of the Act provide provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in cases of amalgamation or business reorganization as specified therein.

Section 72A and 72AA provide that accumulated loss of the amalgamating entity or predecessor entity shall be deemed to be the loss of the amalgamated entity or the successor entity for the previous year in which amalgamation or business reorganisation has been effected or brought into force. Further, section 72 of the Act provides that no loss (other than loss from speculation business) under the head “Profits and gains from business or profession” shall be carried forward for more than 8 assessment years immediately succeeding the assessment years for which the loss was first computed.

In order to bring clarity and parity with the provisions of section 72 of the Act, it is proposed to amend section 72A and section 72AA of the Act to provide that any loss forming part of the accumulated loss of the predecessor entity, which is deemed to be the loss of the successor entity, shall be eligible to be carried forward for not more than eight assessment years immediately succeeding the assessment year for which such loss was first computed for original predecessor entity.

The aforesaid amendments shall apply to any amalgamation or business re-organisation which is effected on or after 01.04.2025.

International Financial Services Centre (IFSC)

In order to attract and promote additional activities in the IFSC, it is proposed to provide specific benefits to ship-leasing units, insurance offices and treasury centres of global companies which are set up in the IFSC. Further, to claim benefits, the cut-off date for commencement in IFSC has also been extended by five years to 31.3.2030.

Extension of benefits of tonnage tax scheme to inland vessels

Tonnage tax scheme in Chapter XII-G of the Act was brought vide Finance Act, 2004 in order to promote Indian shipping industry wherein the qualifying shipping companies were given the choice to opt for the tonnage tax regime or continue to remain within the normal corporate tax regime.

Presently the tonnage tax scheme is available to only sea going ships. To promote inland water transportation in the country and to attract investments in the   sector, it is proposed to extend the benefits of tonnage tax scheme to Inland Vessels registered under Inland Vessels Act, 2021. Accordingly inland vessels have been included in the section 115VD for being eligible to be a qualified ship.

Increasing time limit available to pass order under section 115VP

Section 115VP of the Act pertains to method and time of opting for tonnage tax scheme, under which the tonnage income of an assessee shall be computed in accordance with the provisions of Chapter XII-G. Sub-section (1) of section 115VP of the Act provides that a qualifying company may opt for the tonnage tax scheme by making an application to the Joint Commissioner having jurisdiction over the company, as prescribed, for such scheme.

 It is proposed to amend sub-section (4) of section 115VP to provide that for application received under sub-section (1) on or after the 1st day of April, 2025, order under sub-section (3) shall be passed before the expiry of three months from the end of the quarter in which such application was received.

Harmonisation of Significant Economic Presence applicability with Business Connection

It is proposed to amend Explanation 2A of section 9 so that the transactions or activities of a non-resident in India which are confined to the purchase of goods in India for the purpose of export shall not constitute significant economic presence of such non-resident in India. This will bring it in coherence with the Explanation 1 to clause (i) of sub-section (1) of section 9 for business connection.

Rationalisation of taxation of capital gains on transfer of capital assets by non-residents

It is proposed to amend the provisions of section 115AD to provide that income-tax on the income by way of long-term capital gains on transfer of securities (other than units referred to in section 115AB) not referred to in section 112A, if any, included in the total income, shall be calculated at the rate of twelve and one-half per cent instead of ten percent.

Tax certainty for electronics manufacturing Schemes

It is proposed to provide a presumptive taxation regime for non-residents who provide services to a resident company that is establishing or operating an electronics manufacturing facility.

Need clarity on the latest Income Tax Act amendments in Budget 2025? Talk to our tax experts at IndiaFilings for personalized guidance and compliance support. 

Get expert assistance today!

About the Author