FINANCE ACT 2025

1. Every year, the government presents a Budget. It tells how much money it wants to earn and spend.
2. But to make the Budget official, the government needs to pass a Finance Bill.
3. The Finance Bill is a law that allows the government to collect taxes and spend money.
4. It includes all the tax changes (like increase or decrease in income tax, GST, customs duty, etc.)
5. The government presents the Finance Bill in Lok Sabha (the lower house of Parliament).
6. Because it is a Money Bill, only Lok Sabha can pass it. Rajya Sabha can give suggestions, but cannot stop it.
7. It must be passed before April 1 — when the new financial year starts.
8. After Lok Sabha passes it, and Rajya Sabha gives its suggestions, the President signs it.
9. Once the President signs it, it becomes a Finance Act (a law).
10. To summarise Finance Bill = The legal permission to collect taxes and use money as per the Budget.

Key Amendments in Finance Act 2025

1. Indian residents can now indirectly invest in offshore funds managed from India without affecting the fund’s non-resident tax status under safe harbour rules.
2. The 6% Advertisement Equalisation Levy (Ad EL) on payments for online ads to foreign companies is withdrawn for payments received or receivable on or after 1 April 2025.
3. A new presumptive taxation scheme applies to foreign companies providing services or technology in electronics manufacturing and overrides older net or gross basis tax rules.
4. If there is a significant mismatch between the current and previous year’s tax return, the system will auto-adjust income or tax liability using AI-based processing.
5. Block assessment after a tax search will now apply only to undisclosed income (UDI), not to regular income reported in previous filings. This change in block assessment will apply retrospectively from 1 September 2024.

WITHDRAWAL OF ADVERTISEMENT EQUALISATION LEVY (AD EL)

What is Equalisation Levy (EL)?

1. In 2016, the Indian government brought a special tax called Equalisation Levy.
2. It applies to foreign digital companies like Google or Facebook.
3. These companies earn a lot of money from Indian users, through ads or online sales.
4. But they don’t have an office or branch in India — so they were not paying income tax here.
5. To fix this, India started charging tax on the money they earn from Indian customers — this tax is called Equalisation Levy (EL).

Ad EL (Advertisement Equalisation Levy)

1. Started on 1 June 2016.
2. If an Indian business paid a foreign company for online ads, it had to deduct 6% tax before paying.
3. Example: If a company paid ₹100 to Facebook for ads, ₹6 had to be given to the Indian government as Ad EL.
4. This was only for advertising and marketing services.
5. This 6% tax was called Ad EL.

E-com EL (E-commerce Equalisation Levy)

1. Started later in April 2020.
2. This tax was 2% on e-commerce sales made by foreign platforms to Indian users.
3. Example: Amazon selling to Indian customers, Booking.com giving hotel bookings in India.
4. This was a wider tax than Ad EL — it applied to any sale or service done online by a foreign company.
5. It was called E-com EL.

What Changed

Finance Act (No. 2), 2024:

1. This law removed the 2% E-commerce Equalisation Levy (E-com EL).
2. This means: From 1 August 2024, foreign online platforms like Amazon, Booking.com, AliExpress, etc., will no longer be charged this 2% tax on their sales or services to Indian users.
3. Earlier, they had to pay 2% tax on any amount they earned from:
   1. Selling products to Indian users, or
   2. Providing services through websites or apps accessed in India.
4. This change was made because India is cooperating with other countries under a global tax reform called the OECD BEPS 2.0 Project.
5. This global reform has two parts (Pillars):
   1. Pillar One – Ensures that big digital companies pay taxes where they earn users and profits, not just where they are based.
   2. Pillar Two – Sets a minimum global tax rate to prevent tax avoidance by shifting profits to low-tax countries.
6. So, India is phasing out its own digital taxes like E-com EL, to make way for this new, unified global tax system.

Amended Finance Bill (FB) 2025:

1. This further step removes the 6% Advertisement Equalisation Levy (Ad EL).
2. This tax applied to Indian companies when they paid foreign companies like Google, Meta, LinkedIn for:
   1. Online advertisements
   2. Digital marketing services
3. Until now, Indian advertisers had to deduct 6% from the payment and give it to the Indian government.
4. Now, the government says:
   → For any payment received or receivable on or after 1 April 2025,
   → This 6% Ad EL will no longer be charged.
5. This is also part of India's move to align with global digital tax rules.
6. Instead of a special digital tax, India will now tax these companies using its normal income tax laws, if they meet certain criteria (like Significant Economic Presence).

How Will They Be Taxed Now?

1. After the withdrawal of Ad EL (6%), the income of foreign companies from Indian ad services will now be taxed under the Income Tax Act.
2. India will apply a rule called Significant Economic Presence (SEP) to decide whether a foreign company is taxable.

What is SEP (Significant Economic Presence)?

1. SEP means that a foreign company can be taxed in India even if it has no physical office or branch here

1. If it earns a large amount of money from Indian users
2. If it has a large number of Indian users interacting with its platform.

Conditions for SEP – Tax Can Apply If:

1. The company earns more than a specified amount of revenue from India.
2. The company has “systematic and continuous engagement” with Indian users, like through apps, websites, or data collection.
3. The government has notified monetary/user thresholds for SEP (these are updated in official notifications).

What If the Company Has No PE (Permanent Establishment) in India?

1. PE means a fixed place of business — like an office, factory, or branch.
2. If a company does not have a PE, Indian tax law would normally not apply.

NEW PRESUMPTIVE TAX SCHEME FOR ELECTRONICS SERVICES/TECHNOLOGY

1. Foreign companies often provide services or technology to support electronics manufacturing in India.
2. If such a company had a Permanent Establishment (PE) in India (like a branch office or fixed place of business),
   → It was taxed on a net basis – that means, after deducting expenses, tax was applied on the net profit.
3. If the foreign company did not have a PE,
   → Then it was taxed on a gross basis – tax was applied directly on the full amount paid (as royalty or fees for technical services, or FTS), without any deductions.
4. These two methods created complex tax calculations, paperwork, and sometimes disputes.

What’s Changed (After Amendment)

1. A new presumptive taxation scheme has been introduced for such foreign companies providing services or technology in electronics manufacturing.
2. Under this scheme, tax is calculated in a simplified way, based on a fixed percentage of income or receipts.
3. This overrides both of the earlier methods:
   → No need to go through net basis rules for PEs.
   → No need for gross basis rules for royalty/FTS.
4. This makes taxation predictable and easier to comply with.

Mismatch In Tax Return Information – Ai-Based Adjustments

1. When a person files their Income Tax Return (ITR), the system compares it with the previous year’s return.
2. If there are major differences or mismatches (like sudden rise/fall in income, big changes in deductions, exemptions, etc.),
3. The system will now automatically flag these mismatches.
4. It will then make adjustments to your income or tax payable based on those mismatches.
5. This is done using AI-based technology or computer-aided processing — no manual officer is needed at this stage.
6. It helps catch errors or intentional misreporting before assessment begins.
7. This is known as computer-aided automated processing.
8. It is similar to AI-based scrutiny, where a system checks for red flags and corrects them without delay.
9. It aims to speed up return processing and reduce human workload.

CHANGE IN BLOCK ASSESSMENT FOR UNDISCLOSED INCOME

Earlier Rule (Before Finance Act No. 2, 2024)

1. During a search and seizure operation (like an Income Tax raid), the tax department would investigate a person's finances.
2. It used to conduct separate assessments for each year covered in the search.
3. These assessments included both:
   → Undisclosed Income (UDI) – income that was hidden or not reported.
   → Regular Income – income that was already reported in tax returns.
4. This led to duplicate assessments and extra compliance burden.

What Finance Act (No. 2) 2024 Introduced

1. A new system called the New Block Assessment Regime was introduced.
2. It allowed for a single, consolidated assessment for all years covered in the search (a “block period”).
3. But it still included both UDI and regular income in this one assessment.
4. This simplified the number of assessments but still caused overlaps with regular tax filings.

What Finance act 2025 Has Now Changed

1. Now, under the amended rule, the New Block Assessment Regime will be used only for assessing UDI.
2. Regular income will no longer be assessed again under this regime.
3. The change is retrospective – it applies from 1 September 2024 onward.
4. This ensures focus remains only on unreported (undisclosed) income found during searches.

RELAXATION FOR OFFSHORE FUNDS MANAGED FROM INDIA

1. Offshore investment funds are funds that are set up outside India.
2. If such a fund was managed by a fund manager sitting in India, it could be considered as controlled from India.
3. If the control was seen to be from India, then the fund could be treated as a resident for tax purposes.
4. A resident fund is taxed in India on its entire global income, not just on Indian income.
5. This created a big tax problem for funds managed from India.
6. As a result, Indian investors and fund managers avoided managing offshore funds from within India.

What’s Changed

1. The new amendment changes this situation.
2. Now, even if Indian residents invest indirectly in such offshore funds, the fund will still be considered non-resident.
3. Indirect investment means investing through another company, trust, or financial layer.
4. This change removes the fear that Indian linkages will make the fund taxable in India.

Safe Harbour Protection

1. Such offshore funds can now also claim safe harbour protection.
2. Safe harbour means if the fund follows fixed conditions, the tax department will not challenge its non-resident status.
3. This gives clarity and protection to the fund from tax.

 

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