Finance Bill gives relief on digital tax, provident fund threshold

Parliament on Tuesday cleared changes to the finance Bill 2021, doubling the minimum limit of employee contribution to provident fund to over Rs 5 lakh for the purpose of taxation with some riders, paving the way for the listing of Life Insurance Corporation (LIC), exempting Indian-owned assets sold on digital platforms from equalization levy, and giving tax holidays for the proposed development finance institutions (DFIs).

However, the employee provident fund (EPF) relaxation may benefit only government employees who contribute to statutory provident fund and central provident fund, some experts said.

Now, an employee getting interest on his contribution to the EPF or similar funds of over Rs 5 lakh a year will have to pay tax in case there is no contribution from the employer, according to the amendments proposed by Finance Minister Nirmala Sitharaman and passed by the Lok Sabha. The Rajya Sabha does not have power to make changes to the Bill.

In the Budget presented last month, the finance minister had proposed to tax interest earned on EPF contributions of more than Rs 2.5 lakh annually. However, in the cases where employers contribute, the limit will remain Rs 2.5 lakh only, but the employers' contribution will not be counted.

"While private sector employees earning interest on provident fund on annual contribution exceeding Rs 2.5 lakh would be required to pay tax on interest accruing on the excess contribution, for government employees, the monetary ceiling will be Rs 5 lakh," said Neha Malhotra, director at Nangia Andersen LLP.

“Minor relief is being provided by increasing the threshold of employee contribution to provident fund to Rs 5,00,000 in the cases where employers do not contribute to the PF,” said Gopal Bohra, partner NA Shah Associates.

One of the major changes included the amendments to the Life Insurance Corporation (LIC) Act. It seeks to amend LIC Act, 1956, and brought provisions in alignment with listing and corporate governance norms under the Securities and Exchange Board of India (Sebi). The Budget in February proposed 27 amendments to the Act to help facilitate the listing of the insurance behemoth on the stock exchanges. Through this route, the government may sell shares in LIC.

The amendments proposed to insert new sections in the LIC Act to provide for disqualifications to be a director, disclosure of interest by director and senior management, related-party transactions and adjudication of penalties for contravention or violation liable to penalty under the LIC Act.

The LIC Board will reduce its paid-up equity capital by giving a notice to members and creditors. It will also constitute a committee, which shall be headed by a judge of a high court, to consider repression on reduction, and will submit its suggestions to the board. Further, no one other than the central government shall hold equity shares in excess of 5 per cent of issued equity capital of the corporation.

Another amendment brought in relates to tax holidays for DFIs. The government-owned DFI will be tax exempt for a period of 10 years, while private DFIs will be given tax breaks for five years. However, tax holidays for private DFIs could be extended for 10 years, subject to some conditions.

The amendments also addressed the concerns over the expansion of equalisation levy. Digital tax, aimed at foreign e-commerce operators, will not now apply to goods or services owned and operated by Indians and transacted over an overseas e-commerce platform. This means that if goods or services listed on a foreign marketplace are owned or provided by an Indian resident or Indian permanent establishment of a foreign entity, they shall be out of the purview of the 2 per cent equalisation levy.

“…equalisation levy would treat everybody who is operating in India equally. So, if foreign ecommerce companies pay income tax in India, equalisation levy is not applicable to them. Hence, there is no extra burden on any company,” Sitharaman said.