The Finance (No.2) Bill, 2024, introduces a significant number of amendments to the Income-tax Act, 1961, covering a broad spectrum from Section 2 to Section 285. Notably, it also presents The Direct Tax Vivad Se Vishwas Scheme, 2024, aimed at resolving pending disputes through a compromise on arrears.
While the budget has brought notable changes, especially in the tax rates for foreign companies—reducing the rate from 40% to 35%—partnership firms have not seen similar relief. Here’s an in-depth analysis of the key amendments affecting partnership firms:
Key Amendments Affecting Partnership Firms
1. Enhanced Deduction Limits under Section 40(b)
The Finance (No.2) Bill, 2024, brings a major change to Section 40(b), which deals with the deduction of working partner salaries. The new provision increases the deduction threshold as follows:
- Current Limit: Rs. 3,00,000
- New Limit: Rs. 6,00,000
- Maximum Remuneration: Rs. 3,00,000 or 90% of the book profit, whichever is higher
Effective From: Assessment Year 2025-26
Illustration:
- Current Scenario: If a partnership firm’s book profit is Rs. 10,00,000, the maximum deduction allowed for partner salaries is Rs. 3,00,000.
- New Scenario: With the revised limit, the firm can claim a deduction up to Rs. 6,00,000, or 90% of the book profit, which in this case would be Rs. 9,00,000. Therefore, the maximum allowable deduction now becomes Rs. 6,00,000.
Implications:
- Positive Aspect: The increased limit provides greater flexibility and financial relief to partnership firms by allowing higher deductions for working partners.
- Limitation: Despite this improvement, the tax rate disparity between partnership firms and foreign companies remains unaddressed.
2. Introduction of Section 194T: TDS on Payments to Partners
The new Section 194T introduces a requirement for partnership firms to deduct tax at source (TDS) on payments made to partners:
- TDS Rate: 10%
- Threshold Limit: Rs. 20,000
Illustration:
- Scenario 1: A partnership firm pays a partner Rs. 15,000 as remuneration. Since the payment is below Rs. 20,000, no TDS is required.
- Scenario 2: If the firm pays Rs. 25,000 as commission, TDS at 10% (i.e., Rs. 2,500) must be deducted before making the payment.
Implications:
- Compliance Burden: Smaller or micro partnership firms may face challenges in managing this compliance, leading to increased administrative costs and complexity.
- Threshold Concern: The low threshold of Rs. 20,000 for TDS could lead to frequent and cumbersome paperwork, making financial management more complex.
Summary and Analysis
The amendments in the Finance (No.2) Bill, 2024, present a mixed impact on partnership firms:
Enhanced Deduction Limits: The increase in the deduction limit under Section 40(b) is beneficial, offering more substantial tax relief for partner salaries.
Before Amendment:
- Maximum Deduction: Rs. 3,00,000
- For a book profit of Rs. 10,00,000, the maximum allowable deduction remains Rs. 3,00,000.
After Amendment:
- Maximum Deduction: Rs. 6,00,000 or 90% of the book profit, whichever is higher
- For a book profit of Rs. 10,00,000, the deduction can now be up to Rs. 6,00,000, significantly improving tax relief.
TDS Compliance: The new Section 194T imposes additional compliance requirements that may disproportionately affect smaller firms.
Before Amendment:
- No TDS on payments below Rs. 20,000.
After Amendment:
- TDS of 10% required on payments exceeding Rs. 20,000, increasing administrative complexity.
The changes reflect a nuanced approach, providing some relief while introducing new challenges. Partnership firms will need to navigate these amendments carefully to optimize their tax positions and ensure compliance.
