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The government has brought many changes to the Indian tax regime to help taxpayers. Besides changes in the tax statute, several administrative steps have also been taken to increase transparency, as well as reduce compliance burden and uncertainty. All these steps have directly and indirectly resulted in increasing India’s ranking in Ease of Doing Business and ensured consistent flow of investment into the country.

In the recent past, many steps have been taken to bring in some relief to the individual/non-resident individual taxpayer. Some of these changes are worth noting.

Options for taxpayers
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Options for taxpayers

Introduction of an optional tax regime

An optional tax regime has been introduced with effect from 2020-21 (1 April 2020 to 31 March 2021), which provides for concessional tax rates upon forgoing some exemptions/deductions.

Thus, individual taxpayers now have a choice to pay tax either under the pre-existing regime (Option 1) and continue to avail of the specified exemptions / deductions or opt to pay tax under the new regime (Option 2), which is administratively more convenient but entails forgoing specified exemptions and deductions.

A careful analysis is hence required by an individual taxpayer, to assess which option is better suited to the facts of the case. Individual taxpayers who do not have business income can exercise such an option every year. However, individual taxpayers having business income, the option once exercised for a financial year, shall apply for that year and all subsequent years.

Changes in tax residency provisions

Some important changes have also been done relating to determination of residential status of individuals, which are applicable from 2020-21 onwards, namely:

1. Narrowing scope for Indian citizen/person of Indian origin (PIO)

Earlier, Indian citizen/PIO residing abroad could have visited India for 181 days and remain Non-Resident (NR) in India for tax purposes. This period has now been reduced to 120 days for Indian citizens/PIOs whose Indian sourced total income exceed R15 lakh.

Thus, an Indian citizen/PIO whose stay in India is more than 120 days but less than 182 days would now qualify as “Not ordinarily resident" (NOR) as against NR in India.

2. Introduction of citizenship-based taxation

A new concept of deemed residency has been introduced to tighten the residency provisions for individuals who stay in multiple tax jurisdictions during a financial year.

Now, an Indian citizen, irrespective of his physical presence in India in a financial year, would be deemed to be tax-resident in India, if his Indian sourced income exceeds R15 lakh and he is not liable to tax in any other country by virtue of his domicile or residence or any other similar criteria. A deemed resident would qualify as NOR for tax purposes.

In both these scenarios, the implication is that apart from Indian sourced income, NOR will be liable to pay tax on income earned in foreign countries from businesses controlled in India or profession set up in India.

Liberalised remittance scheme and other payments

It is pertinent to note that scope of tax collected at source (TCS) has now been expanded to remittances made under liberalised remittance scheme (LRS) and purchase of overseas tour packages.

TCS means tax collection by a seller from a buyer in case of certain specified transactions. The government expanded the scope of TCS with effect from 1 October 2020 with an objective to create a tax trail of foreign remittances from India.

TCS is now applicable at 5% on remittances made under LRS in excess of R7 lakh in a financial year through an Authorized Dealer. LRS is a scheme introduced for resident individuals, which allows them to freely remit funds outside India up to $250,000 per financial year to any person outside India, subject to specified conditions. A reduced rate of TCS at 0.5% would apply where amount is remitted towards pursuing education abroad.

TCS is also applicable on purchase of overseas tour packages, irrespective of any value, at 5%. Sellers of overseas tour packages shall collect such TCS from the buyers.

Notably, where the buyer fails to furnish Permanent Account Number (tax registration number) to the seller, the TCS shall be levied at twice the above rates or 5%, whichever is higher.

TCS is not an additional tax. The authorized dealer or tour operator will deposit TCS against Permanent Account Number of the remitter of the funds or buyer and such remitter/buyer can take credit of TCS against his actual tax liability. If there is no tax liability or TCS is more than the actual tax liability, the individual can file Income-tax return and claim a refund.

Change in dividend taxation

Till March 2020, the Indian tax system provided for dividend distribution tax (DDT) regime where Indian companies distributing dividend were required to pay taxes on the dividend distributed. Dividend income was exempt in India, in the hands of shareholders.

However, in many cases, non-residents were not able to claim credit of such DDT in their home country, if dividends received from such companies were also taxed in their home country.

Now, with effect from 1 April 2020, the government has switched to classical method of taxing dividend in the hands of taxpayers. Accordingly, DDT has been abolished and dividend will be taxed in the hands of the individuals at the applicable slab rates. Further, the Indian company while distributing dividend to NRs (other than Foreign Portfolio Investors (FPI)) would be required to withhold tax at either 20% (plus applicable surcharge and cess) or rates as per the prevailing tax treaty rate, whichever is beneficial.

Shift to withholding tax system is a welcome move for NRs, as they may now be eligible to take credit of such withholding tax against the tax payable in their home country.

Further, where an individual taxpayer’s total income falls within a lower slab or it is below the minimum threshold of income chargeable to tax, he can file an income-tax return in India to claim refund of excess tax withheld.

Tax on ESOPs in case of eligible startups

ESOPs are taxable as salary perquisite in the hands of employees at the time of allotment of securities and withholding tax is required to be deposited in the relevant financial year. The perquisite value is calculated as the difference between fair market value (as on the date of exercise) of securities allotted and the exercise price paid by the employees.

To reduce the hardships faced by employees of eligible start-ups, the government has granted some relaxation in respect of timing of deposit of withholding tax on ESOPs. The withholding tax shall be now deposited within 14 days from the expiry of five years from the end of the relevant financial year or date of sale of such securities or date on which individual ceases to be an employee, whichever occurs earlier.

Covid-19-related relaxations

■Residency rule relaxed for individuals stuck in India:

A lot of individuals were stuck in India due to nationwide lockdown amid the covid-19 pandemic and they could not leave India before 31 March 2020. This additional stay in India, for reasons beyond their control could have impacted the residential status of these individuals for 2019-20. To avoid undue hardships in genuine cases, the government provided relaxation by clarifying that period from 22 March 2020 to 31 March 2020 would not be considered while determining the residential status for 2019-20.

Additionally, for individuals quarantined during March 2020, the government clarified that period starting from quarantined date to departure date or 31 March 2020 as the case may be, would be excluded at the time of calculating their Indian physical stay.

■Extension of income-tax return (ITR) filing due date:

The due date for filing ITR by individuals for FY 2019-20 has been extended from 31 July 2020 to 31 December 2020. Although the due date for filing ITR has been extended for everyone, individual taxpayers whose self-assessment tax liability exceeds R1 lakh will be required to deposit interest for delay in filing ITR in case the same is not deposited before 31 July 2020 .

Way forward

These are all welcome changes to help ease the burden of individual taxpayers. Non-resident individuals should take note of these changes and ensure that they are compliant with the extant law, especially in respect of the changes in determining the residential status of an individual.

Nilpa Keval Gosrani contributed to this article.

Vikas Vasal is national leader-tax at Grant Thornton Bharat LLP

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