The Finance Act, 2023, giving effect to the financial proposals of the Union Budget 2023-24, received the assent of the President of India on 31 March 2023 and was published in the Gazette of India as Act No. 8 of 2023. The Act introduced substantial changes to the direct and indirect tax framework, with Sections 2 to 127 coming into force on 1 April 2023 and the remaining provisions to be notified by the Central Government.
Background
The Finance Bill, 2023 was presented in Parliament on 1 February 2023 by the Union Finance Minister as part of the Union Budget for the financial year 2023-24. The Budget proposals were framed against the backdrop of a post-pandemic economic recovery and aimed to simplify the tax structure, enhance compliance, and broaden the tax base.
The key policy objective was to make the new income tax regime introduced in 2020 more attractive by revising the tax slabs and rebate thresholds, thereby encouraging voluntary migration from the old regime. The Bill was passed by the Lok Sabha on 24 March 2023 and received presidential assent on the last day of the financial year, enabling the provisions to take effect from the commencement of the new assessment year.
Key Provisions
The Finance Act, 2023 introduced the following significant changes:
New tax regime as default: The new income tax regime under Section 115BAC was made the default regime for individual taxpayers from assessment year 2024-25. Taxpayers wishing to continue under the old regime with deductions and exemptions must now opt out specifically.
Enhanced Section 87A rebate: The rebate under Section 87A for individual taxpayers under the new regime was increased, making income up to Rs. 7 lakh effectively tax-free, up from the previous threshold of Rs. 5 lakh.
Revised new regime tax slabs: Under the new regime, the tax slabs were restructured with rates ranging from nil on income up to Rs. 3 lakh, 5% for Rs. 3-6 lakh, 10% for Rs. 6-9 lakh, 15% for Rs. 9-12 lakh, 20% for Rs. 12-15 lakh, and 30% above Rs. 15 lakh.
Surcharge reduction: The highest surcharge rate on income above Rs. 5 crore was reduced from 37% to 25% under the new regime, reducing the effective maximum marginal rate from approximately 42.7% to approximately 39%.
Presumptive taxation enhancement: The turnover threshold under Section 44AD for small businesses was raised from Rs. 2 crore to Rs. 3 crore, and the gross receipts limit under Section 44ADA for professionals was increased from Rs. 50 lakh to Rs. 75 lakh, subject to the condition that cash receipts do not exceed 5% of total receipts.
TDS on online gaming: A new Section 194BA was inserted, mandating tax deduction at source on net winnings from online gaming at the rate of 30%, effective from 1 April 2023.
Leave encashment exemption: The exemption limit for leave encashment on retirement for non-government employees was increased from Rs. 3 lakh to Rs. 25 lakh.
Implications for Practitioners
Tax practitioners must immediately update their advisory to individual clients regarding the default applicability of the new regime. Clients who benefit from existing deductions under Sections 80C, 80D, and HRA exemption under the old regime should conduct a comparative analysis before the filing deadline.
The presumptive taxation changes are particularly significant for small business advisors. The higher thresholds with the 5% cash receipt condition effectively creates a two-tier system that incentivises digital transactions.
The introduction of Section 194BA for online gaming establishes a withholding framework for a rapidly growing sector. Gaming companies and platforms must establish TDS compliance mechanisms, and practitioners advising these entities should review the operational implications of calculating net winnings across multiple games and sessions.