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'Liable to Tax' Meaning and Definition in Income Tax Act: Budget 2021

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Budget 2021 has amended the Income Tax Act, 1961 (“Act”) to clarify the meaning of the term ‘liable to tax’ in an effort to end the controversy on the issue. The term ‘liable to tax’ assumed great significance when in the last year the government has amended the law to tax the global income of non-resident Indians (NRIs) who are not ‘liable to tax’ outside India. This year, Finance Bill, 2021 proposed to insert a new clause (29A) to section 2 to define the expression ‘liable to tax’. Hence, it is proposed to define the term “liable to tax” to provide certainty.


Definition of the term - Liable to tax


The Act currently does not define the term ―liable to tax‖ though this term is used in section 6, in clause (23FE) of section 10 and various agreements entered into under section 90 or section 90A of the Act. Hence, it is proposed to insert clause (29A) to section 2 of the Act providing its definition.


The term “liable to tax” in relation to a person means that there is a liability of tax on that person under the law of any country and will include a case where subsequent to imposition of such tax liability, an exemption has been provided.


This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.


For this purpose, a definition of the expression ‘liable to tax’ is incorporated in the Income Tax Act by amending section 2 of the Act vide Clause 3(iv) of the Finance Bill, 2021


For this purpose, a new clause (29A) is inserted in section 2 of the Act and the existing (29A) is renumbered as (29AA).


Amendment of section 2. 


3. In section 2 of the Income-tax Act,–


…….


(iv) clause (29A) shall be renumbered as clause (29AA) thereof and before clause (29AA) as so renumbered, the following clause shall be inserted, namely:–– 


‘(29A) “liable to tax”, in relation to a person, means that there is a liability of tax on such person under any law for the time being in force in any country, and shall include a case where subsequent to imposition of tax liability, an exemption has been provided;’; 


Clause No. 29A to section 2 of the Income Tax Act, 1961 is assigned to the expression ‘long term capital asset’. In other words, section 2(29A) defines the term ‘long term capital asset’ under the Income-tax Act, 1961.

 

Now, the term ‘liable to tax’ is also defined by clause (29A) of section 2. In other words, section 2(29A) defines the expression ‘liable to tax’. 

 

In order to avoid the conflict for similar clause number, the legislation has provided to renumber the clause no. for defining the term, ‘long term capital asset’ as 29(AA). Hence, after the enactment of Finance Act, 2021, section 2(29AA) will define the term ‘long term capital asset’ whereas section 29(29A) will define the term ‘liable to tax’.

 

This has been done because of the reason that the terms are defined in their alphabetical order. Thus after the term "legal representative" [having clause (29)], "long-term capital asset" [having clause (29A)] was in order. But now after the amendment, alphabetically, after "legal representative" and before "long-term capital asset", ‘liable to tax’ is required to be placed. Hence, in order to maintain the alphabetical order (for ease in searching a term in the sea of definition clause), clauses of section 2 have been renumbered.

 

Hence, renumbering in the clauses happened. Hence, from 1st April, 2021, Section 2(29AA) will define ‘long term capital asset’ while section 2(29A) will define ‘liable to tax’.


Amended provisions explained


Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions. 


It is also proposed to insert a new clause (29A) in the said section so as to define the expression “liable to tax”, in relation to a person, means that there is a liability of tax on such person under any law for the time being in force in any country, and shall include a case where subsequent to imposition of tax liability, an exemption has been provided.



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