Finance Bill, 2020 - Key Provisions of Personal and Corporate Taxation
The author is a member of the Institute. She can be reached at nidhijaincosting@gmail.com and eboard@icai.in
New Personal Taxation Regime of Reduced Tax Rates
In line with the new regime of reduced corporate tax rates, Section 115BAC is being introduced with a new personal taxation regime with reduced tax rates in case of Individuals and HUFs. New tax slabs as compared to earlier slab rates are:
Surcharge would continue to apply as earlier.
One can opt for new regime by foregoing certain prescribed deductions/ exemptions such as deductions under chapter VIA (except employers’ contribution to NPS and deduction under section 80JJAA), house rent allowance, leave travel concession, standard deduction, entertainment allowance, profession tax, additional depreciation, interest on loan with regard to self-occupied house property to name a few. Further, loss from let-out property shall only be eligible to be carried forward. It may be noted that Alternate Minimum Tax (AMT) shall not apply in such cases.
To avail new tax regime Individual and HUFs (i) with no business income - can exercise this option every year at the time of filing of return under section 139(1); (ii) with business income - can exercise this option on or before due date of filing the return (option once exercised shall continue for that year and all subsequent years).
Having set a bar on claiming aforementioned deductions/ exemptions, this scheme may be beneficial to taxpayers who have not been claiming many deductions earlier. On the contrary, there may be higher tax outflow under the new regime, as tax benefit on deductions may outweigh the benefit of reduced tax rates under the new regime. In short, introduction of new regime of taxation has given a choice to the taxpayers to judiciously decide and minimise their tax outflow.
Changes in determination of residential status
i. Indian citizen deemed to be resident based on statelessness:
Indian citizen shall be deemed to be resident in India if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
This amendment tries to bring in taxation based on citizenship. It is intended to curb the practice of an individual to arrange his affairs in such a manner that he is not liable to tax in any country or jurisdiction during a year. This could also impact individuals who have permanently settled abroad or settled in countries having no income tax. Further, ‘deemed to be resident’ may have an impact on determining their residential status as ordinarily or not ordinarily resident in the subsequent years.
CBDT has issued press release dated 02.02.2020, stating that in such cases income earned outside India shall not be taxed in India unless it is derived from an Indian business or profession. Necessary amendment is required in this regard.
ii. Reduction of visit threshold from 182 days to 120 days:
It is proposed to amend Explanation 1 to Section 6(1), wherein Indian citizens or Person of Indian Origin visiting India will be considered as resident if their stay is 120 days (as against earlier limit of 182 days) or more in the current year.
On account of this change, individuals permanently settled abroad and visiting India will have to take note of their presence in India. Proposed amendment will also have a check on individuals who are actually carrying out substantial economic activities from India, but manage their period of stay in India, so as to remain a non-resident in perpetuity and not be required to declare their global income in India.
iii. Relaxation in Resident but Not Ordinarily Resident (RNOR) test:
Now individual or HUF (whose Manager) would be considered as ‘Not Ordinarily Resident’ (RNOR) if he has been non-resident in India in seven out of ten previous years. The amendment has done away with erstwhile conditions and one simplified condition has been introduced to ensure that a non-resident is not suddenly faced with the compliance requirement of a resident.
Taxation of employers’ contribution to retiral benefits in excess of specified limits
Currently, employers’ contribution to following retirals are taxable if:
- Provident Fund contribution is in excess of 12% of salary; or
- NPS contribution is in excess of 14% of salary for Central Government employees and 10% in other cases; or
- Superannuation Fund contribution is in excess of ₹ 1,50,000.
It is now proposed to introduce an aggregate monetary limit of ₹ 7,50,000 in respect of employer contribution to aforesaid schemes. Contribution in excess of this limit and annual accretion on such excess would be a taxable perquisite under section 17.
Introduction of monetary limit would have an impact on employees in the higher income bracket. This could also lead to double taxation in the event withdrawal from such funds is also taxable. With this backdrop, employees may need to have a cursory view on their compensation structure.
Easing the tax burden of employees of eligible start-ups
Currently, the specified security and sweat equity shares are taxable as perquisite at the time of exercise. To ease the tax burden of employees of eligible start-ups (Section 80-IAC), it is proposed to defer its taxation and taxes shall be paid within 14 days of earlier of the following:
- Expiry 48 months from end of the relevant assessment year, or
- Sale of shares by employee, or
- An employee’s resignation.
Accordingly, taxes have to be deducted by employer under section 192 or paid by assessee directly under section 191 as the case may be.
Though this amendment could ease out cash flow issues of employer and employee, however, it may increase the cost of administration and compliance in order to track the year of taxability and making the tax payments. Currently, benefit under this section has been extended to employees of eligible start-ups, however benefit could have been extended to all other employees as well.
Increase in Turnover Threshold Limit for Tax Audits under section 44AB
It is proposed to increase turnover threshold for tax audit for persons carrying on business from ₹ 1 crore to ₹ 5 crore, provided annual cash receipts and payments do not exceed 5% of the total receipts and payments, respectively. However, no change is proposed in threshold limit for persons carrying on profession.
Increase in the threshold would reduce the compliance burden of small and medium enterprises on satisfaction of twin conditions of cash receipts and payments not exceeding 5% of total receipts/ payments. This is one more step towards achieving cash less economy. However, a clarity is required if cash tax payments, or expenses otherwise not deductible would also fall under cash payments limit of 5%.
It may be noted that, liability to deduct / collect taxes under section 194A, 194C, 194H, 194I, 194J and 206C shall continue to apply in case of Individual / HUFs where gross receipts/ turnover exceeds ₹ 1 crore in case of business or ₹ 50 lakhs in case of profession. Thereby, inspite of increase in threshold for audit, one would still have to comply with TDS/TCS provisions.
Further, where tax audit is required under section 44AB, due date of return filing of return of income is extended to 31st October.
Increase in the Safe Harbor Limit for Real Estate Transactions
Existing provisions of Section 43CA, 50C (sellers) and 56(2)(x) (purchaser) provide that consideration on transfer of land or building should be in accordance with stamp duty valuation and allow a safe harbour of 5% of consideration. This limit is proposed to be increased to 10%.
Increase in the cap to 10% is a welcome step and would help reducing tax burden of the assessee.
Cost of Acquisition of Assets Acquired Before 01.04.2001
For the purpose of computing cost of acquisition of capital asset being land or building or both acquired before 01.04.2001, it is proposed to provide that fair market value (FMV) of such asset as on 01.04.2001 shall not exceed wherever available, its stamp duty value as on 01.04.2001.
As validating genuinity of cost of acquisition in each case may not be possible, this provision will restrict claiming of FMV as cost of acquisition where the stamp duty value is comparatively less. It may be noted that safe harbour provided under section 50C, 56(2) of 10% is not made available under this section.
Incentives to Start-ups
Section 80-IAC is proposed to provide that (i) deduction shall be available for a period of 3 consecutive assessment years out of 10 years (as against erstwhile 7 years) beginning from year in which it is incorporated; (ii) deduction shall be available, if the total turnover of its business does not exceed ₹ 100 crores in any of the previous years beginning from the year in which it is incorporated.
Having extended the period to 10 years, this would benefit start-ups who start making profits only in later years.
No Limitation on Interest Paid or Payable to Indian PE of a Non Resident (NR)
Section 94B provides for limitation on deduction of interest paid/payable to associate enterprise (AE). It is proposed to provide that, where lender is an Indian PE of a non-resident, engaged in the business of banking, provisions of deemed AE (and disallowance of interest deduction) under section 94B will not apply.
Aligning the Purpose of entering into DTAA with Multilateral Instruments (MLI)
For India, MLI has entered into force on 01.10.2019 and will apply alongside existing Double Taxation Avoidance Agreements (DTAAs). Article 6 of MLI intends to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Amendment is proposed under section 90 and 90A to align with Article 6.
Deferring Applicability of Significant Economic Presence (SEP)
Scope of business connection of a non-resident in India was expanded through introduction of SEP under section 9(1)(i). The monetary and number of users thresholds were not yet notified. In light of on-going discussions on the subject in G20-OECD BEPS project, applicability of SEP and its revised definition is proposed to be deferred to be applicable from AY 2022-23 and onwards.
Business Connection – Income Attributable to Operations in India
In case of ‘business connection’, it is proposed to clarify that income attributable to operations carried out in India shall include income from:
- advertisement targeted at customers residing or customer accessing advertisement through IP address located in India;
- sale of data collected from a person who resides or who uses IP address located in India; and
- sale of goods and services using data collected from a person who resides or who uses IP address located in India.
Widening of the scope of business connection could have major impact on assessees’ from non-treaty jurisdictions.
Changes in relation to TDS/ TCS
TDS on E-commerce Transaction - Insertion of Section 194-O
To bring participants engaged in the electronic commerce within the tax net, it is proposed to levy TDS at the rate of 1% (5% in no PAN/ Aadhaar cases) on e-commerce transaction. Exception being where Individual / HUF (e-commerce participant) have furnished PAN/ Aadhaar and gross sales or services or both through e-commerce operator does not exceed ₹ 5,00,000.
For eg: A (buyer) visits website of T (e-commerce operator) to book hotel rooms/ movie tickets of H (participant). Further, one needs to contemplate whether sale of goods/ services through digital, electronic facility could include even those goods/ services only facilitated (where goods/services are not sold/provided digitally or cases where buyers reach the website of vendors/ participants by clicking on the advertisements) through the e-commerce operator.
Amending the Definition of Work in Section 194C
Currently, definition of work excludes “manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer”.
Some assessees used this as escape clause by getting contract manufacturer to procure the raw material supplied through its related parties thereby not being liable to TDS. To plug the leakage, ‘work’ is proposed to include raw material provided by customer or its associate. Associate mean as persons specified under section 40A(2)(b) (related parties). Therefore, now any work carried on using raw material provided by the associate shall also be liable to TDS.
Rate of TDS on Fee for Technical Services Reduced
It is proposed to reduce the rate of TDS in case of fees for technical services under section 194J (other than professional services) to 2% from existing 10%. This would iron out litigation on account of short deduction (under section 194J vis-à-vis 194C). However, it is important to have clarity on interpreting fee for technical versus professional services.
TCS on Foreign Remittance through Liberalised Remittance Scheme (LRS)
It is proposed to levy TCS at 5% (10% in no PAN/Aadhaar cases) on (i) Amount received by an Authorised dealer exceeding ₹ 7,00,000 in a financial year for remittance out of India under the LRS of RBI. (ii) Amount received by seller of an overseas tour program package. This shall not apply to a buyer (i) who is liable and has deducted TDS under other provisions; (ii) is Central Government, a State Government, etc.
This could result in levy of TCS even on remittance which is not in the nature of income (like transfer of funds overseas bank account). Further, this will increase compliance burden of Authorised Dealer (AD) requiring them to keep a track of monetary limits. On the other side, it may create hardship to the purchasers of foreign currency for emergency and essential purposes such as medical, studies, business trips, family maintenance, etc. As the LRS is applicable only to resident individuals under FEMA, non residents shall be out of it.
Further, as section casts responsibility on seller of overseas tour packages, there may be chances of TCS being collected by them and ADs resulting in double collection. Clarity is also required to understand that whether foreign tour packagers shall be liable to collect TCS.
TCS on Sale of Goods
Every seller, who receives sale consideration of any goods exceeding ₹ 50 lakhs in any previous year (other than goods on which TCS otherwise collectible under the Act) shall collect from the buyer TCS of 0.1% (1% in no PAN/Aadhaar cases) of sale consideration exceeding ₹ 50 lakhs. This provision not to apply if buyer is liable and has deducted TDS. ‘Seller’ to mean a person whose total sales, gross receipts or turnover from business carried on by him exceed ₹ 10 crore during immediately preceding financial year. This would cast additional liability apart from levy of GST.
Concessional Rate of TDS – 194LC
Benefit of concessional TDS rate of 5% in respect of interest on overseas borrowings, long-term bonds and rupee denominated bonds (RDBs) is proposed to be extended up to 1st July 2023. Further, TDS at 4% is proposed on long-term bonds and RDBs listed on a recognised stock exchange in an IFSC.
TDS on Investments by a Foreign Institutional Investor (FII) or QFI – 194LD
Benefit of concessional TDS at 5% in respect of interest paid to an FII or a QFI for investment in government securities and RDB is proposed to be extended up to 1st July 2023. Further, benefit will be extended to investments in municipal debt securities.
Insertion of Taxpayer’s Charter
To build trust between the taxpayers and tax administration, it is proposed to insert Section 119A to empower the CBDT to adopt and declare a Taxpayer’s Charter.
Additional Condition on Grant of Stay by the ITAT
Currently, ITAT has full power to grant stay of income tax demand under section 254(2A), even an absolute stay of demand, in deserving cases. However, it is proposed to provide that stay may be granted on condition that assessee deposits atleast 20% of the amount of tax, interest, fee, penalty or any other sum payable under the Act, or furnish security of equal amount in respect thereof.
This could majorly have an impact on high pitched assessment cases, wherein 20% would also be a huge sum. However, assessee would still have the option of filing writ petition.
Faceless ‘e-Appeals’ and ‘e-Penalty’
In line with new scheme of ‘faceless e-Assessments’ as introduced earlier, it is proposed to insert new sub-section (6B) in Section 250 and sub-section (2A) in Section 274, so as to facilitate incorporation of ‘new scheme of faceless e-appeals and e-penalty’, respectively, to be notified in near future. These initiatives are intended to iron out difficulties faced by the assessees’ and enhance transparency.
Annual financial statement (AFS)- Section 285BB
It is proposed to delete Section 203AA and introduce Section 285BB regarding AFS. Section 285BB proposes to mandate tax authorities to upload in registered account of tax payer a statement, setting forth such information, which they possess. Accordingly, AFS with wider information coverage would replace Form 26AS.
Penalty for Fake Invoices – 271AAD
It is proposed to levy penalty on a person, if it is found during any proceeding under the Act that in books of accounts maintained by him there is a (i) false entry or (ii) any entry relevant for computation of total income has been omitted to evade tax liability. The penalty shall be equal to aggregate amount of false entries or omitted entry.
Unlike the existing penalty provisions where penalty on bogus purchases, etc. was leviable on the tax sought to be evaded, Section 271AAD invokes penalty equal to amount of false entries/ omitted entry. This shall also have serious consequences in the hands of any person who assists in making false entry/ omitting entry, as such person shall also be liable to penalty equal to aggregate amount of false entries or omitted entry.
Miscellaneous
- Deduction under Section 57 for Dividend Income: Consequent to abolition of DDT, dividend income shall be taxable in the hands of shareholders / unit-holders and only interest expense, if any, up to 20% of dividend shall be allowed as deduction under section 57. Though this would reduce litigation around Section 14A on the other hand limiting of interest expense to 20% could increase litigation in the areas of claiming other incidental expenses. Further, in the event no dividend income is earned, deduction could be denied.
- Concessional 22% Tax Rate for Resident Co-operative Societies: Option of reduced tax rate of 22% available to domestic companies is proposed to be extended to resident co-operative societies not availing tax incentive or exemptions or tax holiday on similar lines with domestic company.
- Electricity Generation Companies under Section 115BAB: Benefits of reduced corporate tax rate of 15% under section 115BAB is proposed to be extended to companies engaged in electricity generation.
- Cinematography Films under Royalty Definition: Currently, definition of royalty under section 9(1)(vi) excludes “consideration for sale, distribution or exhibitions of cinematography films”. It is now proposed to include such amounts within the purview of royalty.
- Optional Deduction under Section 35AD: To provide clarity, it is proposed to make deduction under section 35AD optional enabling assessee to claim deduction under section 35AD or depreciation under section 32.
- Carry Forward under Section 72AA for Public Sector Amalgamations: Benefit of carry forward under section 72AA is proposed to be extended to (i) Amalgamation of the nationalised public sector banks; (ii) Amalgamation of nationalised public sector general insurance companies.
- Expansion of APA and SHR Scope: It is proposed to clarify and expand scope of Advance Pricing Agreement (APA) provisions and SHR to include determination of profit attributable under section 9(1)(i) to a Permanent Establishment (PE).
- Section 115UA Extension: Provisions of Section 115UA proposed to be extended to unlisted investment trusts.
- Expansion of e-Assessment: Currently, e-assessment scheme covers only assessment under section 143(3). Scheme to now include “best judgment assessment” under section 144.
A New Direct Tax Amnesty Scheme ‘Vivad Se Vishwas’
With a view to reduce litigation, scheme proposes full waiver of interest and penalty if disputed tax amount is paid by 31.03.2020. Scheme shall remain open till 30.06.2020, but amnesty will only be partially available for payments made after 31.03.2020.
There may not be much incentive in case where appeals are pending before High Court or Supreme Court and taxes outstanding have already been recovered by the department.
Thus one can say that with this Union Budget, Government has made earnest efforts to dot the i’s and cross the t’s!