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The Finance Minister, Ms. Nirmala Sitharaman presented NDA 2.0’s first budget yesterday. The Budget aims to build a strong foundation for the future of India. However, fiscal deficit continues to be a concern and the numbers for 2019-20 present a worrying picture. Tax wise, as always, the devil lies in the detail – here’s our analysis of the Finance Bill 2019

A few mounds of rice from paddy that is harvested from a small piece of land would suffice for an elephant. But what if the elephant itself enters the field and starts eating? What it eats would be far lesser than what it would trample over
FM Nirmala Sitharaman
Excerpt from "Yannai Pugundha Nilam"

Quick read

  • Tax rates for individuals earnings more than Rs. 2 Crores modified. Additional surcharge of 25% and 37% levied. Lower tax rate of 25% extended to corporates with turnover less than Rs. 400 Crores…read more
  • Partial relaxation from angel tax offered to startups. Norms for carry forward of losses have been relaxed… read more
  • Pass through benefit of losses extended to unit holders of AIFs… read more
  • Tax filing has been made mandatory to certain classes of persons. PAN & AADHAR have been made interchangeable… read more
  •  New sections to deduct tax introduced & scope has been expanded. Clarification provided for meaning of ‘consideration’ u/s 194-IA and application for lower TDS made online… read more
  • The scope of Statement of Financial Transactions has been increased… read more
  • Deductions for interest on home loans and purchase of electric vehicles… read more
  • Gifts to non-residents shall be taxable… read more
  • Buy back of listed shares will now be subject to tax… read more
  • Modification in CbCR reporting… read more
  • Additional incentives for contribution to National Pension Scheme and withdrawal of accumulated funds therefrom… read more

Tax rates

If your earnings are less than Rs. 2 Crore, there is no change for you vis-a-vis the Interim Budget. The effective basic exemption continues to be Rs. 500,000 & Cess continues to be 4%.

However, if your earnings are more than Rs. 2 Crores, be prepared to cough up more! The FM has enhanced surcharge as follows

  • Income between Rs. 2 Crore  – Rs. 5 Crore = 25%
  • Income more than Rs. 5 Crore = 37%

(Applicable to Individuals, HUF & AOPs)

Income Range 2018-19 % 2019-20 % Change%
Upto Rs. 500,000
0%
0%
No change
Rs. 5 - 10 lakhs
20.8%
20.8%
No change
Rs. 10 - 50 lakhs
31.2%
31.2%
No change
Rs. 50 - 100 lakhs
34.32%
34.32%
No change
Rs. 1 - 2 Crore
35.88%
35.88%
No change
Rs. 2 - 5 Crore
35.88%
39%
+ 3.12%
Rs. 5 Crore+
35.88%
42.74%
6.86%

Corporate rate of tax has been retained at 25%. However, the benefit of this lower rate has been extended to all companies with turnover less than Rs. 400 Crores.

The new rate shall be applicable to nearly 99.3% of all companies. The remaining 0.7% shall be subject to 30% tax.There is no change in rate of tax for LLPs & Firms.

"... in view of rising income levels, those in the highest income brackets, need to contribute more to the Nation’s development. I, therefore, propose to enhance surcharge on individuals having taxable income from 2 crore to 5 crore and 5 crore and above so that effective tax rates for these two categories will increase by around 3 % and 7 % respectively"
on revenue mobilisation
FM Nirmala Sitharaman

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Startups

First, the good news – the government is keen to resolve angel tax. It has been proposed that

  • Funds received from Cat-II AIFs (i.e. private equity funds) shall be exempt; similar to Cat-I AIFs (i.e. venture funds),
  • An e-verification process shall be introduced to establish the identify of the investor & the source of funds, thereby reducing unnecessary scrutiny,
  • Pending assessment of startups shall be fast-tracked,
  • An inquiry by the Assessing Officer would be possible only with the approval of his Superiors.
  • The restriction on carry forward of losses by Startups has now been relaxed. Startups can carry forward losses if
    • (a) the minimum shareholding of 51% is maintained, or
    • (b) shareholders appearing on the cap-table in the year of loss, continue to hold shares in the year of set-off
  • Roll over benefit in respect of capital gains from sale of residential property invested in shares of Startup has been extended to 31 Mar 2021

And now, now, the caveat!

  • A closer reading of the Finance Bill reveals that a Startup which fails to satisfy conditions prescribed by Feb’19’s notification (more on that here) would be subject to tax in the year in which such failure occurs.
  • Failure to comply could be because the Startup set up a subsidiary, purchased a motor vehicle costing more than Rs. 10 lakhs, or gave a loan to its employee!
  • What’s truly shocking is that the entire investment (less nominal value of shares, which early is anything) would be subject to tax! This is contrary to what the Act says, i.e. the excess beyond fair value would be subject to tax. A clarification from the Ministry is awaited.
"... Start-ups in India are taking firm roots and their continued growth needs to be encouraged. To resolve the so-called ‘angel tax’ issue, the start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums."
on Startups
FM Nirmala Sitharaman

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Investment Funds

Pass through benefit of losses has been extended to Cat-I & II AIFs. This will bring relief to investors (i.e. unit holders) who were till date, not permitted to offset losses incurred at the fund level. The proposed changes are

  • Loss, other than business loss (e.g. capital loss), would be passed through to investors,
  • Accumulated losses, again other than business losses, till 31 Mar 2019 shall also be passed through to investors. Investors can offset the loss for the remaining period.
  • Business losses shall not be passed through. Further, business profits shall continue to be taxed at the AIF level.
  •  Losses attributable to unit holder in respect of units held for less than 12 months shall not be available for pass through benefit. 

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Tax filing & AADHAR

Mandatory tax filing in certain cases

Despite having earnings less than the basic exemption limit, filing of tax return shall be mandatory if the tax payer has,

  • Deposited, in aggregate, more than Rs.1 crore in one or more current accounts
  • Incurred expenditure on foreign travel exceeding Rs.2 lakhs
  • Incurred expenditure on  electricity exceeding Rs.1 lakh,
  • Total income before availing capital gain exemptions exceeded basic exemption.

Grouped under the head “widening and deepening of tax base”, this amendment was not announced in the Budget speech

Interchangeability of PAN & AADHAR

Quoting of PAN is mandatory for transactions such as sale or purchase of cars, opening of DEMAT account, deposit of cash in excess of Rs. 50,000 etc. 

From 1 Sept 2019, you can quote Aadhaar instead of PAN if

  • PAN is not allotted, or
  • PAN and Aadhaar are linked in the IT portal

Please note,

  • If PAN and Aadhaar are not linked, Aadhaar cannot be used instead of PAN
  • If Aadhaar is not linked with PAN, PAN would be made inoperative
  • The responsibility to authenticate PAN / AADHAR is now on the person quoting & receiving such data.
"Mr Speaker, Sir, more than 120 Crore Indians now have Aadhaar. Therefore, for ease and convenience of tax payers, I propose to make PAN and Aadhaar interchangeable and allow those who do not have PAN to file Income Tax returns by simply quoting their Aadhaar number and also use it wherever they are required to quote PAN"
on PAN & AADHAR interchangeability
FM Nirmala Sitharaman

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Withholding Taxes

TDS on cash withdrawal

With a view to reduce the circulation of cash in the economy, Section 194N is being introduced. Banks, post offices have to deduct tax at  2% for cash payments made in excess of Rs. 1 Crore  to the taxpayer.

This section shall not apply to recipients such as banks, Government etc. & will take effect from 1 September 2019.

TDS on payments by individuals

Currently, there is no requirement to withhold tax for payments made to resident contractors or professionals, when such services are used for personal use.

The FM has proposed to insert 194M Act to provide for levy of TDS at 5% on payment of fee fo contractual work or professional  services.

Meaning of 'Consideration' - TDS on sale of immovable property

As per Section 194IA, tax at 1% shall be deducted on the consideration paid for the purchase of immovable property. However, the term ‘Consideration’ was not defined.

It has now been clarified that charges (e.g car parking fees, electricity and water facility fees) which are incidental to the transfer of immovable property, would fall within the ambit of the term ‘Consideration’.

Application for reduced TDS now online

Effective 1 November 2019, process of application seeking lower or NIL tax deduction for payments made to non-residents, would be made online. This is currently filed manually.

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Scope of Statement of Financial Transactions (SFT) expanded

In order to enable pre-filling of tax returns it is proposed to widen the scope of filing SFT. Currently the threshold for transactions covered by SFT is Rs. 50,000, i.e. any transaction above this requires reporting under SFT.

This threshold is proposed to be removed and therefore it is expected that SFT would be applicable to several persons. This is in line with the government’s goal of achieving a 360 degree profiling of taxpayers & thereby preventing tax evasions

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Making homes and EVs affordable!

An individual can now claim additional deduction of Rs.150,000 towards the interest repayment of housing loan. This is in addition to Rs.2,00,000 already available under the Act.

Residential properties of stamp value not more than Rs. 45 lakhs qualify for the benefit, provided the  individual does not hold any other residential property at the time of taking the loan.

 

Further, electric mobility sees a new push in the Budget with the reduction of GST rates & additional deduction of Rs. 150,000 that can be availed for interest paid on loan taken for purchase of an electric vehicle.

"... Considering our large consumer base, we aim to leapfrog and envision India as a global hub of manufacturing of Electric Vehicles."
on Electric Mobility
FM Nirmala Sitharaman

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Tax on gifts received by non-residents

At present, gift in the form of money or specified property is taxed in the hands of donee, except for certain exemptions provided in the IT Act. Gifts made by residents to non-residents India were claimed to be non-taxable on the basis that such income does not accrue in India. To bring the transaction of gifts made by residents to person outside India under the ambit of tax, it is proposed that such gift shall be deemed to accrue or arise in India.
The benefits available under the relevant article of applicable Indian DTAA shall also continue to apply for such gifts.

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Buy-back of listed shares

With a view to check the practice of unlisted companies resorting to buy- back of shares instead of payment of dividends, Section 115QA was introduced as an anti-abuse provision, providing for a levy of additional income tax at the rate of 20% of the distributed income on account of buy-back of unlisted shares of a Company. Since, there is an additional tax paid by the company on buy-back, exemption has been provided in the hands of the selling shareholders under Section 10(34A) of the Act.  The tax-payers preferred the buy-back option as against payment of dividends, since the effective tax rate for Capital gains was lower than the rate of Dividend distribution tax.  

The Income tax department has noticed instances of this practice being followed in listed companies as well. The Finance ministry has hence, widened the scope of coverage of Section 115QA to cover buy-back by listed companies as well. Therefore, any buy back of shares from a shareholder by a company listed on recognised stock exchange, on or after 5th July 2019, shall also be covered by the provision of section 115QA of the Act. Accordingly, the exemption under Section 10(34A) shall be extended to the shareholders of the listed companies as well.

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Changes in CbCR guidelines

Section 286 provides that every parent entity or the alternate reporting entity (ARE) who is resident of India, shall furnish a report within a period of 12 months from the end of the said reporting accounting year. As the ARE being resident in India follows previous year and it cannot be same as accounting year followed by parent entity,  an amendment has been proposed to provide that the accounting year in case of the ARE of an international group, the parent entity of which is not resident in India, the reporting accounting year shall be the one applicable to such parent entity.

With the above clarification, now ARE will have to file the CbCR report within 12 months from the end of accounting year applicable in the country where such parent entity is resident.

Further, Sec. 92D has been amended to increase the scope of coverage. 92D provides that every Constituent Entity (CE) of an internal group, who has entered into an international transaction or specified domestic transaction shall keep and maintain the prescribed information and documents.

It is proposed to substitute section 92D of the Act, in order to provide that the information and documents shall be maintained by a CE of an international group, and filing of CbCR, shall be applicable even when there are no international transactions undertaken by such CE.

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Other Amendments

  • Currently, a person contributing to NPS is allowed an exemption of 40% of total amount payable to him on closure of the account or on opting out of the scheme. It is proposed to increase the exemption to 60%.
  • Deduction towards contribution to NPS by Central Government employees has been enhanced to 14% (earlier 10%)
  • It is proposed that businesses having turnover exceeding Rs.50 crores are required to mandatorily provide a facility for accepting payment through prescribed electronic modes
  • STT which is currently charged on settlement price (when the option is exercised), will be charged only on difference between settlement price and strike price, going forward
"Mr. Speaker, Sir, our Government has taken a number of initiatives in the recent past for the promotion of digital payments and less cash economy. To promote digital payments further, I propose to take a slew of measures..."
Promoting digital payments
FM Nirmala Sitharaman

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