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The Finance Minister, Ms. Nirmala Sitharaman presented her second budget on 1 Feb 2020. The announcement spooked the markets, tanking the BSE SENSEX by over 900 points. Investors, in general, expected the FM to relax tax on capital gains from sale of securities; the infrastructure & automobile sector expected sops that would boost consumption & the common man hoped for a simpler regime. Has the budget met their expectations? Let’s find out.

"Saun Watan Gulzar Shalamaar Hyur, Dal Manz Pholvun Pamposh Hyuv; Navjavan-an-hund, Vushun Khumaar Hyuv, Myon Watan, Chyon Watan; Saun Watan, Nundbony Watan"
FM Nirmala Sitharaman
Everything that we do, all of us do, is for this beautiful country, Poem by Pandit Dinanath Koul

Quick read

  • New income tax slabs introduced; switch subject to foregoing benefits. No change in surcharge …read more
  • Dividend distribution tax abolished… read more
  • Taxation of Employee Stock Options deferred, & more for startups… read more
  • Modifications to withholding tax (TDS) provisions… read more
  • Tax treatment on Employer’s contribution to Provident Fund .. read more
  • Attribution of profits to PEs now covered under Safe Harbour Guidelines… read more
  • Conditions for determination of residential status modified … read more
  • Improving ease of doing business… read more
  • Other modifications… read more

New income tax slabs

The Finance Bill offers an option to individual taxpayers. They can take benefit of the new tax slabs (alongside) & forego the following exemptions,

  • House rental allowance,
  • Leave travel benefits,
  • Any other allowance for which benefit is allowed,
  • Standard deduction of Rs. 50,000
  • Interest on housing loan, capped at Rs. 200,000
  • Deductions u/s Chapter VI-A, including 80C and 80D
  • Additional depreciation, if the taxpayer earns income from business or profession.
Income Range 2019-20 2020-21 Change%
Upto Rs. 250,000
0%
0%
No change
Rs. 2.5 - 5 lakhs
5%
5%
No change
Rs. 5 - 7.5 lakhs
20%
10%
- 10%
Rs. 7.5 - 10 lakhs
20%
15%
- 5%
Rs. 10 - 12.5 lakhs
30%
20%
- 10%
Rs. 12.5 - 15 lakhs
30%
25%
- 5%
Rs. 15 lakhs+
30%
30%
No change

The taxpayer can continue to opt for the ‘old’ regime and avail all exemptions. These have not been withdrawn permanently. Further, if the taxpayer has business income, he can opt out of the scheme only once. Thereafter, he would be ineligible to enter the new regime again

However, this restriction will not apply to those who do not earn business income. There is no change in the rate of cess and surcharge.

Use our calculator to compute taxes – click here to download.

"... In order to simplify income tax system, I have reviewed all the exemptions and deductions which got incorporated in the income tax legislation over the past several decades. It was surprising to know that currently more than one hundred exemptions and deductions of different nature are provided in the Income-tax Act. I have removed around 70 of them in the new simplified regime. We will review and rationalise the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate."
on new tax slabs
FM Nirmala Sitharaman

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Dividend Distribution Tax abolished!

Under the existing provisions of the Income tax Act, when a Company distributes dividend to its shareholders, tax is required to be discharged by the Company on the amount so distributed at an effective rate of 17.647% as Dividend distribution tax (DDT) (without considering the effect of surcharge and education cess). On the other hand, dividend received by the shareholders was exempt. 

An exception to this exemption was receipt of dividend income in excess of Rs. 10 lakhs by ‘specified assessees’, being residents, who were required to discharge tax at the rate of 10% on such income in excess of Rs. 10 lakhs

The Concept of dividend distribution was re-introduced through the Finance Act 2003 w.e.f. FY 2003-04 (AY 2004-05) since it was easier to collect tax at a single point. This system of taxation was regressive since the incidence of tax was not actually on the person in receipt of the income but on the payer (Company distributing profits). 

The Finance Ministry has therefore decided to abolish DDT. As a result of this abolition, tax would have to be discharged by the recipient shareholders at the tax rates applicable to them. Consequently, the income received as dividends from Companies and mutual funds, which were earlier exempt will now be subjected to tax if these are received on or after 1st of April 2020.

Illustration: Mr. A is in receipt of Rs. 15 lakhs as dividend for the FY 2020-21. Assuming he has other income of Rs. 10 lakhs and no deductions/exemptions/losses available for offset for the said FY, compute the differential income tax liability arising on account of the removal of DDT.

  • Before removal of DDT – Under old slabs = Rs. 52,000
  • After removal of DDT – Under old slabs = Rs. 4,68,000
  • After removal of DDT – Under new slabs = Rs. 4,29,000
"... Further, in order to remove the cascading effect, I also propose to allow deduction for the dividend received by holding company from its subsidiary. The removal of DDT will lead to estimated annual revenue forgone of Rs. 25,000 Crore. This is another bold move which will further make India an attractive destination for investment."
Nirmala Sitharaman Budget 2020
on abolition Dividend Distribution Tax
FM Nirmala Sitharaman

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Tax on ESOPs deferred & more for Startups

Under the current provisions of the Income tax Act, in case of ESOPs, taxability in the hands of the allottee employees is triggered when the employee exercises his/her option. Further, the employer is required to withhold taxes from the employee’s salary when the employee exercises his right. In a nutshell, the employee has to lose money by way of Income tax regardless of whether or not the Employee has sold his shares, thus impacting the cash flows of the employees adversely.

The Budget has brought about some relief for employees of eligible startups, i.e. only covered under Section 80-IAC (& not the ones generally recognised by DPIIT) by deferring the point of taxation.

 

By virtue of the amendment, tax is required to be deducted/paid within 14 days from:

  • the expiry of 5 years, from the end of the financial year in which options are exercised, or
  • the date of sale of shares, or
  • the date of which the assessee ceases to be an employee of the eligible start up, whichever is earlier.

Sec. 80-IAC has been aligned to the latest recognition norms for startups, i.e. benefit to extend to 3 out of 10 years from date of incorporation & a turnover limit of Rs. 100 Crores.

"Start-ups have emerged as engines of growth for our economy. Over the past year, our Government has taken several measures to hand- hold them and support their growth. During their formative years, Start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees."
on Employee Stock Options
FM Nirmala Sitharaman

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Modifications to Withholding Tax / TDS / TCS provisions

  • The definition of “Work” u/s 194C has been amended to include purchases from “associates”. It has been noted that some assessee are using the escape clause of the section by getting the contract manufacturer to procure the raw material supplied through its related parties. As a result, a substantial amount of income escapes the tax net.
  • Withholding tax on interest income from long-term infrastructure bonds reduced to 4% (erstwhile 5%)
  • New section 194-O inserted – E-commerce operators should deduct 1% tax on gross value of sales or services routed through the platform. However,
    • no tax shall be deducted if the aggregate value of supplies through the e-com operator is less than Rs. 500,000
    • the rate shall be 5% if the supplier does not provide PAN / Aadhar
  • TDS on Fee for  technical services paid to residents reduced from 10% to 2%. There are no changes to withholding tax provisions on payment to non-residents.

The following shall be covered within the scope of Tax Collection at Source (TCS)

  • Outward remittance under the Liberalised remittance scheme of more than Rs. 700,000 in a financial year – 5% (if PAN / Aadhar is not available, then 10%)
  • A seller of an overseas tour program package who receives any amount from any buyer – 5% (if PAN / Aadhar is not available, then 10%)
  • A seller of goods (whose turnover of previous year is more than Rs. 10 Crores) is liable to collect tax at the rate of 0.1%. on consideration received from a buyer in a previous year in excess of Rs. 50 lakh. (if PAN / Aadhar is not available, then 1%)

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Tax treatment of Employer's contribution to Provident Fund

Under the existing provisions, contribution to PF exceeding 12% was taxable as salary, whereas contribution to SuperAnnuation fund exceeding 1.5 Lakh was taxable as perquisite. Similarly assessee is eligible for deduction under NPS for the 10% of salary contributed by employer without any limit.

The finance bill has come up with a ceiling limit on contribution to NPS, RPF and superannuation fund to Rs.7.5 Lakh and any contribution over and above the limit would be taxable in the hands of employee as salary. Further any annual accretion by way of interest, dividend or any other income to the credit of the scheme or fund may be treated as perquisite to the extent it relates to employer contribution

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Coverage under Safe Harbour Guidelines expanded

Safe Harbour Rules (SHR) provide a window for the taxpayers to declare prescribed margins without the fear of being questioned by the tax authorities. The rule was inserted to reduce the number of transfer pricing audits and prolonged disputes in the case of relatively smaller assessees.

Foreign Companies having presence in India in form of Permanent Establishments (PEs), could not avail this benefit. The tax authorities had wide powers to determine profits earned by these PEs. This lead to litigation. The budget, this year, has expanded the scope of Safe Harbour rules allowing foreign companies to attribute profits to their PEs. This inclusion shall lead to more certainty and should hopefully reduce litigations with respect to the attribution of income to such PE’s.

Further, PEs can avail benefit of Advance Pricing Agreements.

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Residential status norms revised.

When a Person of Indian Origin or a Citizen of India domiciled outside India, comes on a visit to India during the financial year, he will qualify as a ‘Resident’ of India if he stays in India for a more than 182 days. 

The Income tax department has noticed few cases where  individuals who are actually carrying our substantial economic activities in India, manage their period of stay outside India, so as to qualify as a non-resident in perpetuity. They are thus, not required to declare their global income in India. There are also cases where Individuals arrange their economic affairs in such a manner that they are not liable to pay tax in any country or jurisdiction during a year. Such arrangements are usually resorted to by High Networth Individuals to avoid payment of tax. 

 

With a view to mitigate such practices, the following changes have been made in Section 6 of the Income tax Act. The changes made in this connection are as under:

  •  In case of a Person of Indian Origin or an Indian Citizen who comes on a visit to India, the limit for determination of residential status has been reduced from 182 days to 120 days.
  • An Indian citizen who is not liable to tax in any other country or territory by reason of residence / domicile shall be deemed to be resident in India.

Conditions of recognition as Resident – Not Ordinarily Resident have been relaxed as well. The revised rule will only require being non-resident in India for 7 out of 10 years.

Press release on 2 Feb 2020 clarifies the position further. Read the press release here.

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Improving ease of doing business

Government has recently introduced e-assessment scheme for scrutinising tax returns avoiding personal interface between the taxpayer and department officials. This facility is  now being extended to filing e-appeals before the tax authorities to ensure efficiency, transparency, and accountability.

Non-residents receiving income in the form of royalty or fee for technical services (FTS) from Indian concern or Government on which tax has been deducted need not file tax returns. This benefit is presently available only to non-residents earning income in the form of interest or dividend income. This benefit shall be available only if such FTS income is not attributable to Permanent establishment of the non-resident.

Limit to get books audited under tax law has been enhanced from Rs. 100 lakhs to Rs. 500 lakhs. This benefit shall be available only if,

  • aggregate receipts by the person in cash does not exceed 5% of total receipts
  • aggregate payments by the person in cash does not exceed 5% of total payment

Due date of filing income tax return & tax audit report has been extended to 31st October.

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Other modifications

  • Amendment of Sec. 43CA & 50C – Deviation between stamp duty value and consideration can be upto 10% (earlier, 5%)
  • Every charitable institution/trust or any other entity claiming deduction of income under section 10(23C) receiving donations needs to furnish a statement of donations. Deduction shall be claimed by the donor only if the donee has filed the above statement. Non filing of the statement shall attract Rs.200/- penalty for every day till it is filed.
  • Govt has extended the time limit for sanctioning the loans for affordable residential property loans for one more year i.e., till 31st March 2021. Interest paid on the loans will be eligible for additional interest deduction of upto Rs.1.5 lakhs. Benefit shall be available only such properties whose stamp value does not exceed Rs.45 lakhs and assessee should not own any residential property on the date of sanction of loan.
  • New scheme ‘Vivad Se Vishwas’ introduced along the lines of ‘Sabka Vishwas’; no interest & penalty if disputed tax is paid by 31 Mar 2020.
"... Taxpayers in whose cases appeals are pending at any level can benefit from this scheme. I hope that taxpayers will make use of this opportunity to get relief from vexatious litigation process."
on Vivad se Vishwas Scheme
FM Nirmala Sitharaman

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