Salient Features of the Finance Bill, 2020 - Direct Taxes

A. DIVIDEND DISTRIBUTION TAX

1. Dividend income to be taxed in the hands of the Shareholders – Dividend Distribution Tax being abolished

The Finance Bill, 2020 has proposed to make a far reaching amendment to the system of taxing dividend income. At present, a company is required to pay dividend distribution tax under section 115-O at the rate of 15% (effective tax rate of 20.56%) on the amount of dividend declared/distributed or paid by such company. Further, under section 115BBDA, a person resident in India other than a domestic company or a fund or institution eligible for exemption under section 10(23C) or registered under section 12A of the Income-tax Act is required to pay a further tax on dividend income exceeding ₹ 10 lakh at the rate of 10%. Now, under the proposed amendment, the liability to pay dividend distribution tax under section 115-O and on dividend income exceeding ₹ 10 lakh under section 115BBDA is being abolished. Instead, dividend received by any shareholder will be considered as its ordinary income and will be taxable at the rate applicable to such person with no threshold exemption.

However, in order to avoid cascading effect of tax on a shareholder which happens to be a company, old Section 80M is being revived. As per this Section 80M, dividend income received by a domestic company from any other domestic company to the extent such dividend is distributed by such company on or before one month prior to the date of furnishing of return of income shall be allowed as deduction while computing its income. Accordingly, in case a company receives any dividend income during the financial year, say, 2020-21 and such dividend to the extent it is distributed on or before 30.09.2021, the company shall be allowed to deduct dividend distributed by it out of its dividend income received from the other domestic company.

2. Impact analysis of abolition of Dividend Distribution Tax

a. Abolition of dividend distribution tax to adversely affect resident in India

The taxation of dividend income in the hands of the shareholder instead of dividend distribution tax will have mixed consequences. In the case of resident shareholder by and large it will have an adverse impact except a shareholder whose income is chargeable to tax at a rate which is lower than 20% as can be understood from the following table:

On going through the above table, it is to be noted that only in the case of a person having income which does not fall in the tax bracket of 20% or more, the tax liability consequent to this new dividend regime will be lower. In the case of a person who falls in the tax bracket of 20%, the increase in liability will be ₹ 4.52 on every ₹ 100 received. In the case of a person in tax bracket of 30% and not liable to surcharge, the increase in liability will be of ₹ 17.05 on every ₹ 100 received as dividend. In the case of a person having income of ₹ 50 lakhs and being liable to surcharge at the rate of 10%, the increase in tax liability on dividend income of ₹ 100 received will be ₹ 20.82. In the case of a person having income exceeding ₹ 5 crore and dividend income exceeding ₹ 10 lakhs, there will be increase in tax liability of ₹ 16.72 on every ₹ 100 received as dividend income exceeding ₹ 10 lakhs.

b. Effective tax rate on companies to go up substantially under new regime of dividend taxation

It may also be relevant to analyse the effective tax rate on the company including its shareholder consequent to the proposed changes in the dividend tax regime. The same may be understood from the below table:

As per the table above, a company presently is liable for tax at the effective rate of 53.72% assuming that shareholder is liable to pay tax on dividend income exceeding ₹ 10 lakhs as well. Under the proposed dividend taxation regime, this tax rate will increase to 62.75%. Thus, for every ₹ 100 earned by such company only ₹ 37.25 will be net income available in the hands of the shareholder. Even in the case of a company which opts for the tax rate of 22% (effective tax rate of 25.17%) the net tax rate will increase from 46.77% to 57.16%. The net income available to a shareholder for every ₹ 100 earned by the company will be ₹ 42.84. This can be seen from the below table:

Further, a company as on date is required to spend 2% of its profit towards corporate social responsibility (CSR) in case profit is more than ₹ 5 crore or more as per the provision of Section 135 of Companies Act, 2013. It is also important to note that no deduction of this CSR expenditure is allowed while computing business income. Thus, the CSR obligation of 2% is like an additional tax or cess and hence the net income in the hands of the shareholder get further reduced to that extent.

c. Abolition of dividend distribution tax to benefit multinational companies

Though the above analysis indicate that switching over from dividend distribution tax to tax dividend income in the hands of the shareholder will be disadvantageous to almost all domestic shareholders, the same will however be advantageous to the overseas investors. At present dividend is distributed by the company to its shareholder after paying the dividend distribution tax. The credit of such dividend distribution tax paid by the company is not available to the overseas shareholder in their home country. In the new dividend tax regime, tax on such dividend income will be levied in India in the hands of the shareholder with the result that such overseas shareholder will be eligible to take credit of the tax so paid on its dividend income in India against the tax liability on such dividend income in its home country. Further, the tax rate on dividend income in the hands of the overseas shareholder is much lower in view of the tax rates on such dividend income being prescribed in the Double Taxation Avoidance Agreement (DTAA). The tax rate on dividend income under various DTAA ranges from 5% to 15%.

d. Buy back of shares apparently to be a better option than distribution of dividend

With the proposed change of taxing dividend income in the hands of shareholder where tax rate on such dividend income goes as high as up to 42.74%, it may be advisable that in the case of companies predominantly owned by the promoters, such companies should opt for buy back of shares rather than distribution of dividend. As per provision of Section 46A, on purchase by the company of its own shares from the shareholder, the difference between the cost of acquisition and the value of the consideration received by the shareholder is deemed to be the capital gain arising to such shareholder. However, such capital gain is exempt under section 10(34A) in the hands of the shareholder if the company under section 115QA is required to pay tax on the distributed income to the shareholder on buy back of its shares. This tax rate is 20%. This distributed income is the difference of the amount paid by the company on buy back of shares and the amount which was received by the company for issue of such shares determined as per Rule 40BB. Thus, the tax liability on buy back of shares that is required to be paid by the company at the time of buy back of the shares is much lower as compared to the tax on dividend income under the new regime of dividend taxation as can be seen from the following table:

It may be relevant to point out that under the provisions of the Companies Act, a company can buy back its paid up equity capital and the amount of the buy-back should not exceed 25% of the aggregate paid up capital and free reserve of the company with a restriction of no further issue of share capital within a period of six months except by way of bonus issue. Further, no buy back can be made within a period of one year from the date of closure of the preceding offer of buy back. Considering the above provision, a company can plan to make an offer of buy back to the extent it intends to declare and pay dividend. On such income being distributed by way of buy back of shares, company will be required to pay tax at the rate of 20% (effective tax rate 23.30%) under section 115QA. The amount so received by the shareholder on buy back of share will be exempt under section 10(34A) of the Act. The benefit of this concessional rate of tax under section 115QA can now be availed by both listed and unlisted companies. In the case of listed companies, where the promoters want to retain certain prescribed percentage of holding and consequent to buy back of shares, there may be a possibility of reduction in such holding, such reduction can be recouped by such promoter through purchase of share through open market post buy back of shares by the company. Further, in case consequent to such buyback of shares regularly, there is an overall reduction in the paid up capital of the company, the same can also be recouped by issue of bonus shares.

B. CHARITABLE TRUSTS

1. All existing charitable trusts/institutions to apply for re-registration

The Finance Bill, 2020 has proposed far reaching amendment in respect of all charitable trusts/institutions claiming exemption under section 10(23C) or under section 11 of the Income-tax Act. At present a charitable trust or institution is required to obtain registration under section 12A at the time of its inception and one such registration is granted, the same is valid till such time it is withdrawn or cancelled under section 12AA(3) or Section 12AA(4) of the Act. It has now been proposed in the Finance Bill, 2020 that the provision of Section 12AA shall not be applicable on or after 1st June, 2020. Further, a new clause (ac) has been inserted in Section 12A w.e.f. 1st June, 2020 providing that where the trust or institution is registered under section 12A or under section 12AA, it shall be required to make an application in the prescribed form to the Principal Commissioner or Commissioner for registration of trust within three months from 1st June 2020 and such trust or institution should obtain registration under section 12AB. Thus, all existing trusts or institutions which are registered under section 12A or Section 12AA will mandatorily be required for re-registration within a period of three months starting from 1st June, 2020 i.e. upto 31st August, 2020 and obtain registration under section 12AB.

However, it has been provided under section 12AB that in such cases where the trust/institution is already registered under section 12A or Section 12AA and such application is made as is required under the above clause, registration shall be granted by the Principal Commissioner or the Commissioner by passing an order within a period of three months from the end of the month in which the application was received and such registration shall be valid for a period of 5 years. This amendment will require every trust or institution which are registered to apply again and in case such application is not made, then, by implication, the registration shall stand cancelled on the expiry of three months i.e. 31st August, 2020 with the result that such trust or institution shall not be eligible for claiming exemption in respect of its income under section 11 of the Act.

Further, as per Section 115TD of the Act, such trust or institution shall be required to pay tax on the aggregate fair market value of the total assets of the trust or the institution as on 31st August, 2020 which exceeds the total liability of such trust on that date. The tax payable on such value shall be at the maximum marginal rate. This provision can have a far reaching implication on many of the trusts or institutions which though may not be having much income but may be having assets by way of properties etc. which are rented out at a very old nominal rate in case such trust or institution fails to apply again and obtain registration under this new Section 12AB of the Act.

It is to be noted that there is no threshold exemption and all trusts or institutions registered will have to mandatorily apply for re-registration. There may be many trusts or institutions which may not be functional or defunct or having some disputes and despite there being no income during the year, such trusts or institutions will still become liable to pay tax on the fair market value of the assets exceeding the liability held by it consequent to the applicability of Section 115TD in the absence of registration.

Further, it has been provided that a trust or institution which has been registered under new Section 12AB it shall be required to apply for re-registration at least six months prior to the expiry of the period of registration i.e. 5 years. Thus, there will be an obligation on trust registered to apply for re-registration at least six months prior to the expiry of the period of registration of 5 years. It is to be noted that at the time of re-registration, the Commissioner shall call for such documents or information and make enquiry to satisfy himself about the genuineness of the activities of the trust or institution and also the compliance of such requirement of any other law for a time being enforced by the trust or institution which may be material for the purpose of achieving its object. It is only after being satisfied about the objects of the trust, the genuineness of the activities of the trust and the compliance of the requirement of any other law for the time being enforced that the Commissioner shall pass an order granting registration under section 12AB. Such order of re-registration shall also be for a period of five years only and such trust shall again be required to apply for re-registration at least for six months before the expiry period of re-registration of five years. Such order of registration or re-registration can be passed by the Commissioner within a period of six months from the end of the month in which the application for registration or re-registration is made.

Apparently, there was no reason for asking re-registration of such trust and then to restrict the registration for a period of 5 years. All these trusts or institutions are managed by part-time/retired persons and do not have much resources or access to professional advice. Thus, to expect from such trusts or institutions, a high level of compliance apparently is not desirable. As analysed above, the implication of registration being cancelled are far reaching i.e. tax at the maximum marginal rate on the fair market value of the net worth of the company in view of provision of Section 115TD of the Act.

2. Provisional registration to a new trust or institution

The Finance Bill, 2020 has proposed to grant provisional registration to a new trust or institution. The application for such registration has to be made at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought. On making such application, an order shall be made granting provisional registration for a period of three years from the assessment year from which the registration is sought. This order shall be passed by the Commissioner within a period of one month from the end of the month in which the application was received. Further, it has been provided that such trust or institution which has been provisionally registered, it shall apply for regular registration at least six months prior to the expiry of the provisional registration or within six months of commencement of its activities whichever is earlier. On application so filed by such trust or institution, the Commissioner will follow the same process as is for re-registration i.e. calling for document and information etc.

It may be relevant to point out sub-clause (vi) of clause (ac) of Section 12A(1) in the Finance Bill, 2020 has put a condition of making an application one month prior to the commencement of the previous year relevant to the assessment year from which the registration is sought. This clause is intended for new trust or institution. However, practically it may not be possible for a new trust or institution to make an application one month prior to the previous year for which registration is sought. Take a case that in case a trust is created in May, 2020 and it needs a registration in respect of the activities which include donation received in the financial year (previous year) 2020-21. As per the condition of this clause (vi), in order to be eligible to claim exemption in respect of donation received during this financial year 2020-21, it ought to have applied for registration one month prior to the beginning of the previous year 2020-21 i.e. in February 2020. This is practically impossible as the trust itself has come into existence in May, 2020. Apparently, there appears to be a drafting error. The requirement should be to make an application within one month from the beginning of the assessment year. This will take care of the trust or institution which get registered in the last month of the financial (previous year) say March, 2021 and it receives donation in the month of March 2021 itself on which it will be claiming exemption. Thus, a period of one month from the end of the previous year or one month from the beginning of the assessment year will be the right condition rather than one month prior to the commencement of the previous year.

3. Approval under section 10(23C) to be obtained again

The Finance Bill, 2020 has proposed similar amendment as in the case of trusts or charitable institutions under section 12A(ac) and 12AB in respect of trust or institution claiming exemption under section 10(23C). All such trusts or institutions shall be required to apply for approval again within a period of three months from 1st June, 2020 i.e. by 31st August, 2020 and the approval so given shall be for a period of five years. The approval shall be granted for a period of 5 years and it has to be renewed again after a period of 5 years by making an application at least 6 months prior to the expiry of the registration period of 5 years.

4. Approval under section 80G also to be obtained again

The Finance Bill, 2020 has proposed similar amendment in respect of the approval under section 80G. As per the amendment, all trusts or institutions which have obtained approval for the purpose of the deduction under section 80G shall be required to apply again for seeking approval within three months from the first day of June, 2020 i.e. 31st August, 2020. In case such approval is not applied, then donation made to such trust or institution shall not be eligible for deduction under section 80G. Such approval shall be for a period of 5 years and has to be applied again at least 6 months prior to the expiry of the period of registration. The Commissioner shall follow the same process as is proposed for renewal of registration under section 12AB i.e. calling for document and information, making enquiry about the genuineness of the activities of the trust or institution and fulfilment of all the conditions stated in Section 80G(5).

5. Trust or institution to file annual statement of donation

The Finance Bill, 2020 has proposed to insert Clause (viii) and (ix) in Section 80G(5) requiring trust or institution approved under section 80G to file statement of donation received and also to issue the certificate to the donor. It has been further stated that deduction on account of donation under section 80G shall be allowed to the donor only on the basis of the statement filed by the donee trust or institution. The statement has to be filed in the prescribed form and within such time as may be prescribed by the Rules. In case of delay in filing such statement a late fee of ₹ 200 per day shall be applicable under newly inserted Section 234G of the Act. Further, a penalty under section 271K, which shall not be less than ₹ 10,000/- and which may extend up to ₹ 1.0 lakh shall be leviable if the trust or institution fails to file such statement.

All the above amendments relating to charitable trust or institution shall be effective from 1st June, 2020.

C. INTERNATIONAL TAXATION

1. Period of stay for non-resident Indian being reduced from 182 days to 120 days

As per the provisions of Section 6(1) of Income-tax Act, an individual is said to be resident of India if he has been in India for a period of 182 days or more. Further, an individual is also considered to be resident if during the year he has been in India for 60 days or more and such person has been in India within the last four years for a period of 365 days or more. On fulfilling of either of the above condition, an individual is considered to be a resident in India. However, in order to give concession to citizens of India, in the existing Explanation below this Section 6(1), it has been provided that a citizen of India who leaves India in any previous year as a member of the crew of Indian ship or who leaves India for the purpose of employment outside India, then the second condition of 60 days stay in India, in case he has been in India for 365 days or more in the four preceding years, will be relaxed and such Indian citizen will not be considered as resident if he is in India for less than 182 days during the year despite the fact that such individual has been in India for 365 days or more in the preceding four years. This relaxation is applicable in the first year when an Indian citizen leaves India to become non-resident.

In the case of citizens of India and person of Indian origin who have become non-resident, the above Explanation further gives a relaxation to such citizens of India on similar lines. For such non-resident citizen of India who being outside India comes on a visit to India in any year, such Indian citizen will not be considered to be resident of India if the stay in India is less than 182 days despite the fact such Indian citizen was in India for 365 days or more in the preceding four years. This relaxation has been given only to citizen of India considering the fact that Indian citizen may be required to visit India frequently for social obligation, health, taking care of the parents etc.

The Finance Bill, 2020 has now proposed an amendment whereby the visit of Indian citizen who are non-resident has been restricted to less than 120 days in a year. Accordingly, Indian citizen who are non-resident their stay in India during the year has to be less than 120 days in order to maintain the status of non-resident if they have been in India for a period of 365 days or more during the preceding four years. This amendment will affect the frequent visit of the non-resident Indian as non-resident Indian will have to restrict their stay in India to less than 120 days, otherwise such non-resident Indian will be considered as resident and liable to pay tax on global income.

This may cause hardship to many non-resident Indian citizen as well as person of Indian origin if they have to stay in India for period of 120 days or more on account of health, social obligation, taking care of the parents or any other contingency. This may ultimately also reduce bonding of non-resident Indian citizen settled abroad with India. The country has been greatly benefited by the contribution of Indian citizen settled abroad. This amendment has been proposed on the reasoning that the period of 182 days is being misused by many individuals who are actually carrying out substantial economic activities from India and such individual manage their stay in India, so as to remain a non-resident and hence are not required to declare their global income in India. Though there may be many such individuals which may be managing their period of stay of less than 182 days so as to avoid paying tax on global income in India but merely on that reasoning the law should not be changed as it will affect not only these individuals who are misusing such provision, but also all non-resident Indian citizens who are not misusing this provision but are otherwise required to be in India on account of health, social obligation, taking care of the parents or any other contingency.

Further, the objective of collecting tax on global income from those individuals who manage their period of stay in India to avoid paying tax on global income in India will still not pay tax on global income as such individual will now manage their period of stay in India of less than 120 days as against less than 182 days at present for avoiding payment of tax on global income in India. It may be relevant to point out that this period of 182 days has been reduced to 120 days in the case of the citizen of India or person of Indian origin who having been outside India comes on a visit to India. The period of 182 days shall continue to apply in respect of citizen of India in the first year when they become non-resident when they leave India as a member of the crew of the ship or for the purposes of employment outside India. Thus, in the first year the benefit of 182 days will still be available but after first year the period of stay in India has to be less than 120 days for Indian citizens and persons of Indian origin in case such non-resident wants to continue to enjoy the status of non-resident.

2. Indian Citizens to be deemed resident of India

The Finance Bill, 2020 has proposed an amendment in Section 6 by inserting sub section (1A) whereby an Indian Citizen i.e., irrespective of the fact that such Indian citizen was not in India for more than 182 days during the year, such Indian citizen will be deemed to be a resident of India and consequently liable to pay tax on global income, if such Indian citizen claims that he is not liable to tax in any other country by reason of his domicile / residence or any other criteria of similar nature. The objective of this amendment has been stated to tax such Indian citizens who claim themselves as stateless persons as it is possible for an individual to arrange his affairs i.e. stay in the various countries in the manner that he does not become resident of any country during the year and hence not liable to pay tax on its income in any of the country. This amendment will have far reaching implications on all Indian non-residents despite the fact such non-residents may not be liable to be considered as resident of India.

Now, the first implication will be that of jurisdiction on all such Indian non-residents of Indian Income Tax Officer. If any person is an Indian Citizen and despite the fact such person is non-resident of India and bonafide resident of any other country even say USA or Europe, the Income tax officer with this amendment has got a jurisdiction on all Indian non-resident Citizens to issue notice and ask for details of global income and evidence of payment of tax on such income in one or other country. If tax has not been paid on any part of the global income, then Income Tax Officer can ask why the same has not been paid and if such Indian non-resident claims that he has not been paid tax because he has earned income in a country where it is not taxable and if he is not resident of that country, then this clause may get invoked.

Thus, the implications of the amendment will be:

1. Jurisdiction of Indian Income Tax Officer to question all Indian non-residents.
2. To ask details of all global income from Indian non-residents which will include bank accounts and investments outside India.
3. To ask all Indian non-residents to establish of which country such Indian person were residents during the relevant year.
4. To demonstrate tax has been paid in the country of their residence on all global income by such Indian non-residents.
5. If tax has not been paid on any part of global income, to explain why and on which ground it has not been paid.
6. If tax has not been paid on any income on the ground that he is not domiciled/resident of that country where such income has been earned, then Indian Tax officer will consider such person as deemed resident under this proposed amendment.
7. If a person is considered as deemed resident of India, such person under Indian Income Tax becomes liable to pay tax on all global income in view of provision of Section 5(1) of the Income-tax Act, whereby a resident is liable to pay tax on entire global income.

The above analysis shows that the most crucial implication of the proposed amendment is jurisdiction/right of Income Tax officer to question all Indian non-residents, to seek details of global income and shifting of onus on all such Indian non-residents to demonstrate whatever income he has earned, he has paid tax on such income in one of the country, otherwise the same will be liable for taxation in India. It is further important to note that the clarification issued by CBDT on 2nd February, 2020 to allay above apprehension has not only added to the confusion but goes against the provision of Income-tax Act applicable as on date.

The clarification issued by CBDT states that “in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India, shall not be taxed in India unless it is derived from an Indian business or profession”.

The above clarification is contrary to the provision of Section 5(1) of the Income-tax Act. There is no such provision whereby in the case of a resident of India which will include deemed resident that income earned outside India will not be taxable and only income derived from an Indian business or profession will be taxable. The deeming fiction proposed in the Finance Bill, 2020 doesn’t state so. The proposed amendment states that such Indian resident will be a deemed resident. Once a person is deemed to be resident of India, under section 5(1), such person will be liable to pay tax on its global income which includes not only income earned in India but also income earned abroad. It cannot be said that in such case, only income derived from an Indian business or profession only will be taxed in India. The resident has to pay tax on entire income from all sources whether earned in India or abroad. Once a deeming fiction is created that the person is deemed to be resident, then all consequences have to follow. Further, under existing law also, every non-resident irrespective of his citizenship is required to pay tax on all income earned in India. It can’t be interpreted that such person will be required to pay tax only on income derived from business or profession in India.

It is to be noted that it is only in the case of resident but not ordinary resident that the income derived from a business controlled in or a profession set up in India is taxable in India. But this status of resident but not ordinary resident has another condition that such person should be non-resident in 9 (proposed to be reduced to 7) out of 10 preceding years. Thus, the benefit of this clause may not be applicable to all the non-residents who may be considered as deemed residents under the proposed amendment. Further, the use of the word “bonafide” in the clarification further gives an authority to Income Tax officer to challenge the status of non-resident. The proposed amendment and the clarification can have serious implications by interpreting that all those Indian Citizens who are not liable to pay tax in the country of their residence, as deemed resident of India and being asked to pay tax in India even on income earned in the country of residence of course subject to benefit of tax credit in respect of tax, if any, paid outside India in such income. This may lead to a situation where such Indian may surrender Indian Citizenship and obtain Citizenship of any other country so as to avoid all such complications.

3. Period of Not Ordinarily Resident extended to 4 years

As per the provision of Section 6(6) an individual and HUF is considered to be not ordinarily resident in India during the year if such individual or Karta of such HUF has been a non-resident in 9 out of the 10 preceding years or has been in India for a period of less than 730 days during the preceding 7 years. Further as per the proviso to Section 5(1) such resident is not liable to pay tax in respect of income which accrues or arises to him outside India during the year except such income which is derived from a business controlled in or a profession set up in India. The Finance Bill, 2020 has proposed to give extended period of this status of not ordinarily resident by considering the status as not ordinarily resident if such person has been non-resident in 7 of the 10 preceding years as against 9 of the 10 preceding years at present. The other condition of a period of less than 730 days during the preceding 7 years is proposed to be deleted.

With this relaxation such person i.e. an individual or HUF can have a status of not ordinarily resident for a period of four years as against two years at present. During this period when the status is that of not ordinarily resident such person shall not be required to pay tax on income which accrues or arises to him outside India during the year except income derived from the business controlled in or a profession set up in India. This amendment may be beneficial to many expats who come to India for employment as these expats will be able to enjoy the status of resident but not ordinary resident for a period of 4 years from the year they become resident in India and consequently will not be required to pay tax on their global income during this extended period of 4 years of resident but not ordinary resident.

D. TAX COLLECTION AT SOURCE (TCS)

1. TCS on Overseas Remittances

The Finance Bill, 2020 has widened the scope of tax collection at source by inserting a new sub-section (1G) in Section 206C whereby, every person, being an authorised dealer, who receives an amount of ₹ 7 lakh or more in a financial year for remittance out of India from a buyer under Liberalized Remittance Scheme of the RBI shall be required to collect tax at source at the rate of 5% at the time of debiting the amount to the buyers or at the time of receipt of such amount from the buyer by any mode whichever is earlier. In case of non-furnishing of PAN or Aadhaar by such buyer, the tax shall be required to be deducted at 10% under section 206CC of the Act. It has been clarified that in case the nature of the payment is liable for deduction at collection at source or any other provision of the Act, then tax shall not be required to be collected at source on such payment.

This amendment will have far reaching implication as remittance being sent by all residents for the various purposes including education of children, medical treatment or investment otherwise shall be liable for tax collection at source. The objective for introducing this scheme apparently has been stated that many of such persons who send such remittances are not filing tax returns. In case this is one of the reasons, then the compliance of the same could have been easily achieved by widening the scope of Section 139(1) making it mandatory for such person to file tax return rather than collecting tax at source from such person. In case such person is not liable for tax, there is no reason why tax should be collected at source. This will not only increase the compliance burden of the authorised dealer and the remitter but also increase the paper work as many of these persons will be seeking certificate of no deduction or lower deduction under section 197 or asking for refund of the tax so collected at source. This amendment shall be effective from 01.04.2020 and as such tax shall be required to be collected under this provision from 01.04.2020.

2. TCS on Overseas Tour Package

The Finance Bill, 2020 under the above new sub-section (1G) of Section 206C has also proposed for collection of tax at source by the seller of overseas tour program package to collect tax at source at the rate of 5% at the time of debiting the amount to the purchase of the overseas tour program package or at the time of receipt of such amount, whichever is earlier, at the rate of 5%. In case of non-furnishing of PAN or Aadhaar by such buyer, the tax shall be required to be deducted at 10% under section 206CC of the Act.

It is to be noted that no threshold has been fixed in respect of overseas tour program package, meaning thereby that for every small payment made, the seller shall be required to collect tax at source. The scope of overseas tour program package is also very wide as its meaning has been defined to mean any tour program which offers visit to a country or territory outside India and include expenses for travel or hotel stay or boarding or lodging or any other expenditure of similar nature or in relation thereto. The above definition apparently mean that this provision shall be applicable not only when there is a package which include both travel and stay but will also be applicable when the payment is either for travel or stay or any other expenditure of any similar nature are incurred. Thus, apparently on purchase of ticket for overseas travel also, this provision will be applicable.

However, it has been clarified that in case the nature of the payment is liable for deduction at collection at source or any other provision of the Act, then tax shall not be required to be collected at source on such payment. Thus, while making payment to the tour operator, in case the tax is being deducted of the tour operator by the payee under section 194C of the Act, then tour operator shall not be obliged to collect tax at source in respect of such payment. This amendment shall be effective from 01.04.2020 and as such tax shall be required to be collected under this provision from 01.04.2020.

3. TCS on Sale of Goods

The Finance Bill, 2020 has proposed a new sub-section (1H) under section 206C requiring every seller whose total turnover in the business carried on exceed ₹ 10 crore in the preceding financial year to collect tax at source at the rate of 0.1% of the sale consideration exceeding ₹ 50 lakhs in respect of sale of any goods. Thus, under this provision, every seller whose turnover has been more than ₹ 10 crore in the preceding year will be required to collect at source, from every buyer on purchase of goods by such buyer if the total purchases by such buyer exceeds ₹ 50 lakhs. It may be noted that the tax is required to be collected only in respect of the sale value exceeding ₹ 50 lakhs during the year. In case such buyer does not have the PAN Number or Aadhar Number, then the rate of collection shall be 1% under section 206CC of the Act.

This provision has far reaching implication as the scope is to wide and the magnitude of implication can be understood from the fact that business entities having turnover exceeding ₹ 10 crore will be liable to collect tax at source from all the buyers whose purchases during the year is more than ₹ 50 lakhs. This will mean that on each and every invoice, where the sale exceeds ₹ 50 lakhs, there will be a separate charge of TCS from such buyer. The seller shall be required to maintain an account of the TCS collected, issue TCS certificate, file statement of such tax collected. The buyer on its own will be required to maintain the account of TCS paid by it, the credit of the same in the statement filed by the seller and claim of such TCS in the tax return. This procedure will be applicable for each and every invoice. It need to be emphasised that the volume of work and compliance requirement will be more than the volume of work and compliance under GST which itself is finding difficult to cope with the volume of work.

In the present case of TCS, the requirement will be on all goods whether the same are liable for GST or not. Take the case of a milk, vegetable, cereals traders/distributors. A local milk supplier will be buying its entire supply of milk from the vendor say Mother Dairy. Its purchases in the year are bound to be more than ₹ 50 lakhs from Mother Dairy and turnover of Mother Dairy itself will be more than ₹ 10 crore. Now, under this proposed law, the Mother Dairy on each invoice will be levying TCS at the rate of 0.1%. Mother Dairy will be required to issue TCS Certificate and such TCS credit will be reflected in 26AS. The number of entries for each person will run into hundreds and there will be requirement of reconciliation. Similar will be the case of other such products. Though in the proposed Section, an enabling provision has been made to exempt certain categories but the fact remains that this will affect each and every person carrying on business. One need to consider that in many trades, there is only one supplier and the purchases from such supplier are far more than ₹ 50 lakhs.

The implication can be understood with another example of Oil Company like Indian Oil Corporation. With a turnover of about ₹ 6 lakh crore, it will be collecting TCS from each of its distributor to whom it is supplying oil and the supply of the oil to each of its distributor will exceed ₹ 50 lakhs. Then the distributor will further make the sale to the wholesaler. The distributor then will collect TCS from the whole seller and on each invoice, there will be a separate charge of TCS like GST. The wholesaler on its part will sell to the petrol pump dealer and in turn will levy TCS on each of the invoice raised on the petrol pump dealer. The purchase of each petrol dealer is more than ₹ 50 lakhs. In this process, on each and every subject of the transaction, the TCS will get collected. This will have huge impact not only on the paper work compliance obligation but will also have serious impact on the working capital.

In many of the businesses, the margins are less than 0.1% and particularly in wholesale trading businesses, the margin is less than 0.1%. In these cases, the TCS collected may be more than the total income raising serious issue about the fund flow. The GST having been introduced and there being a complete trail available particularly in respect of the transaction which aggregates ₹ 50 lakhs or more, there is no justification to introduce this provision so as to increase the compliance obligation on the trade which otherwise is finding difficult to cope with the compliance provisions under the GST Law. Contrary to introducing such obligation, there is a need to consolidate the compliance under the various statute. The information available under one statute should be used in the other statute rather than asking that information again in the other statute. It will be ideal that tax returns under the various laws are integrated and businessman is required to submit one consolidated return rather than filing so many returns. It appears that while drafting this provision, one has not considered the volume of work and the manpower required for compliance of goods of such provision.

This amendment shall be effective from 01.04.2020 and as such tax shall be required to be collected under this provision from 01.04.2020.

E. VIVAD SE VISHWAS SCHEME

The Finance Minister introduced Direct Tax Vivad se Vishwas Bill, 2020 in the Parliament for resolution of pending tax disputes. Subsequently, there were a number of issues raised in relation to the said scheme. Consequently, the Cabinet approved a number of changes to resolve such issues. Under the revised proposal of Vivad se Vishwas Scheme, a taxpayer is only required to pay the amount to be determined in accordance with the Scheme as a full and final settlement in respect of the dispute. The appeal in relation to the dispute shall be deemed to have been withdrawn and no further proceedings would be initiated in respect of such dispute.

Issues which need further consideration

The amended Vivad se Vishwas scheme has addressed many of the issues that emanated from the Scheme presented initially. However, the Scheme has still not addressed few other issues i.e. dispute at AO’s level and dispute which assessee believes may arise in future, exclusion of disputes set aside by ITAT/High Court or Supreme Court, exclusion of cases of revision under section 263. The same are discussed hereunder:

a. Cases pending before AO or where similar disputes are likely to arise in future

Only those cases where appeals are pending before the appellate forums have been covered. Disputes that are pending with the Assessing Officer have not been covered in the scheme. Exclusion of such cases and not giving an option to settle disputes which are before Assessing Officer doesn’t appear to be a good idea. Ideally, when settlement of disputes is the objective, the scheme should have been extended to cover all disputes and also such disputes that are likely to occur. There is a possibility that in one year, the dispute has reached to appeal level, and similar issue in next year is at Assessing Officer’s level and further similar dispute will come up in subsequent year because of stand taken by the Assessing Officer in the earlier year for which appeal is pending. If one goes for this scheme, he will only be able to settle disputes of such years for which the appeal is pending. However, similar issues which in all likelihood will come up in future because of the stand taken by the Assessing Officer in earlier year will remain pending and entail unnecessary litigation in subsequent years.

Ideally, option should have been given to settle all disputes not only where the appeals are pending but also where assessee visualises such dispute in subsequent years. This would have not only encouraged people to come out clean once and for all and avoid unnecessary litigation in future on similar issues but would also have enhanced revenue collection. Voluntary compliance considering dispute may arise will be far more effective as against later on enforcement mechanism which may be able to identify only a few cases and take action and ultimately recover taxes. The number of cases coming up voluntarily and tax so recovered will be much higher. This will also ensure reduced litigation in future as well.

It may be relevant to point out that in the Sabka Saath Sabka Vishwas Scheme of Indirect taxes, there was an option to the declarant to pay taxes in respect of anticipated disputes and one of the reason for the success of this Scheme was resolution of anticipated disputes. Accordingly, the scope of Vivad se Vishwas Scheme needs to be expanded so as to include declaration in respect of anticipated disputes in respect of the returns already filed by the taxpayer. In such cases, the declarant will clearly state the issue and the amount involved and pay taxes thereon. In case of any dispute arising in future, the declarant will get immunity in respect of the issue and to the extent of the amount stated in the Declaration. This will encourage many taxpayers to settle anticipated disputes and will ensure that the number of disputes in the coming years also do not rise much. This enabling provision may itself bring additional revenue of at least ₹ 100,000 crore which otherwise may be difficult to realise despite best of enforcement mechanism provided in the Act.

b. Cases set aside by ITAT, High Court or Supreme Court

In the revised scheme, orders for which time for filing appeal has not expired as on 31st January, 2020 has been included. However, those disputes which have travelled to an Appellate Forum earlier and has been set aside by the Appellate Forum to the Assessing Officer for one reason or the other have not been included. Similarly there may be cases where assessment orders have been set aside by the Commissioner invoking its powers of revision under section 263 of the Act. A dispute having arisen and the same being subject matter of the appeal, set asiding of the same to the AO is a continuing process of appeal. The objective of the scheme is to put an end to the litigation. Accordingly such cases which have been set aside by the Appellate Forum to the AO need to be included in the scheme. It may be important to point out that these cases will be older than the ordinary appeals having travelled at least once to the Appellate Forum and being back to the AO. This will help in putting quietus to the old litigations.

c. Need to reduce tax rate applicable for dispute on income liable for tax under section 115BBE

The Taxation Laws (Second Amendment) Act, 2016, has amended the provision of Section 115BBE increasing the tax rates applicable on the income in respect of cash credits i.e. unexplained share capital, loan and unexplained investment in money, bullion, jewelry, etc. to 60%. Further, the Finance Act has provided surcharge applicable on such income at the rate of 25% of the tax and cess at the rate of 4% with the result the effective tax rate on such income is 78% from assessment year 2017-18 onwards. A large number of disputes has arisen and are pending in appeals on the issue whether the additions made are justified or not and further, such additions falls within the meaning of income stated in this Section 115BBE so as to be liable for higher rate of tax i.e. 78%. In order to encourage settlement of such disputes, it is imperative that the tax rate is commensurate and at par with the tax rate applicable on other income.

As per the Scheme, in the ordinary case, howsoever grave the case may be, the assessee is required to pay only tax and on payment of such tax, the interest and penalty get waived off. In tax rate of 78% under section 115BBE, the element of penalty is already included, as penalty in such cases is limited to 10% of the income in dispute as against 30% to 90% of the income in the other cases. When this penalty of 30% to 90% is being waived, there is justification that the penalty component included in the tax rate of 78% in Section 115BBE be also reduced appropriately. Thus, in the case of the income in dispute on which tax rate has been applied under section 115BBE, instead of asking 100% of the tax, 50% of the tax may be asked for settlement of the dispute under this Scheme. This will be in line with the proposed Scheme where a higher rate of 125% of tax has been proposed in search cases and lower rate of 50% has been proposed in the case where Department is in appeal. Further, this will also remove discrimination of different tax rates on similar nature of income. The addition in dispute in respect of unexplained cash credit/investment for AY 2016-17 and earlier years can be settled by paying 30% tax whereas the similar addition for AY 2017-18 onwards have to be settled by paying tax at the rate of 75%. It may also be relevant to point out that this amendment was made on 16.12.2016 i.e. when 9 months of the year had already passed. This reduction in the tax rate will go a long way in settling dispute in appeals which have come in large numbers in January 2020 itself and revenue collection on this account itself will at least be 25,000 crore.

d. Additional 10% tax post 31.03.2020 need to have nexus with the disputed tax in arrears

As per the proposed Scheme, disputed tax at the rate of 100% is required in case payment is made on or before 31.03.2020. Similarly, penalty or fee at the rate of 25% is required to be paid before 31.03.2020. However, in case payment is not made by 31.03.2020, then, tax at the rate of 110% and penalty at the rate of 30% is required to be paid. The difference in payment of tax is of 10% and that of penalty is 20%. This provision does not take into account the tax already paid by the taxpayers. The requirement of paying additional tax of 10% should be limited to the amount of disputed tax in arrears as on 31.03.2020 rather than on the total disputed tax.

There is a possibility that in the case of a declarant, the total disputed tax may be ₹ 200 lakhs and out of which, ₹ 190 lakhs would have been recovered and the balance tax payable may be only ₹ 10 lakhs as per the Scheme. In the case of such person, if a declaration is filed and payment is made by 31.03.2020, he will be required to pay just ₹ 10 lakhs. But in case, the declaration is filed after 31.03.2020, then such person will be required to pay ₹ 30 lakhs i.e. 110% of disputed tax of ₹ 200 lakhs which comes to ₹ 220 lakhs minus ₹ 190 lakhs already paid. Considering this fact, this additional tax of 10% be limited to disputed tax in arrear as on 31.03.2020 rather than the total disputed tax. Similarly, in the case of penalty, the additional liability should be restricted to 10% of 25% and not 20% of 25% to make the Scheme fair and equitable.