Here are some of the key changes that will impact taxpayers across various segments, especially individual taxpayers:
Dividend distribution tax gone
Finance Act 2003 had introduced a scheme for payment of Dividend Distribution Tax (DDT) wherein domestic companies were required to pay tax on the dividends being distributed and such dividend was exempt in the hands of the taxpayer. Subsequently, Finance Act 2016 amended the provisions and introduced an additional tax, by taxing dividend income in the hands of shareholders, on dividends above `10 lakh.
This budget has proposed to abolish the DDT regime for dividends declared, distributed or paid on or after 1 April 2020. Consequently, dividends will be subject to tax in the hands of the shareholders at applicable tax rates.
This should benefit foreign investors/companies having subsidiary in India, as they should now be eligible to claim credit for the tax paid on dividends in India, subject to their domestic tax law and respective treaty provisions.
The budget proposes to eliminate the cascading tax effect in case of inter-corporate dividends by providing a deduction in respect of dividends received by a domestic company to the extent such dividend is distributed, as specified.
It is also proposed that interest expenditure be allowed as deduction from dividend income, subject to a cap of 20% of such income, as specified.
It is pertinent to note that the domestic company would be required to withhold tax at source at the rate of 10% where the dividend paid exceeds `5,000.
A change in residency rule
The government has proposed significant changes in the residency rules for individuals which had remained unchanged for many years. As per the current Indian tax laws, an Indian citizen or a person of Indian origin (PIO) visiting India is considered as non-resident if the stay in India in a tax year is less than 182 days.
It has been proposed that an Indian citizen/PIO visiting India for less than 120 days would qualify as non-resident as against 182 days earlier. Therefore, Indian citizens/PIOs visiting India for a longer period would need to evaluate their residential status vis-à-vis the new residency rules.
As per Indian tax residency laws, a resident is further categorized as ‘ordinary resident’ and ‘not-ordinary resident’ and the tax liability in India differs for both categories. Broadly, an ordinary resident is taxable in India on his/her global income whereas a ‘not-ordinary resident’ is taxable on income arising outside India only if it is derived from a business controlled in or a profession set up in India.
The Finance Bill 2020 has proposed to amend the criteria for qualifying as a ‘not-ordinary resident’ in India.
A person would now qualify as a ‘not-ordinary resident’ if he has been a non-resident in India in 7 out 10 preceding tax years (erstwhile conditions included being non-resident for 9 out 10 preceding tax years or stay in India being less than 729 days in the preceding 7 tax years). This amendment would also require evaluating the residential status of expatriates working in India or Indians moving outside India.
Further, the criteria for deemed residency for citizens of India has been proposed. Under this, Indian citizens who are not liable to tax in any other country by virtue of residency, domicile or any other similar criteria, would be deemed tax residents of India.
The finance ministry has subsequently clarified that in case of an Indian citizen who becomes deemed resident under this provision, income earned outside India shall not be taxed in India unless it is derived from an Indian business or profession.
New scheme of personal tax rates
The Finance Bill 2020 has introduced a new scheme of tax rates for individuals and Hindu undivided families (HUF), providing an option to pay taxes at reduced tax rates from financial year 2020-21.
The new rates can be opted for based on certain conditions including giving up certain exemptions and deductions, which is similar to the option provided to domestic companies to pay tax at reduced rates without availing any exemption/deductions.
Some of the popular exemptions/ deductions that would need to be given up include leave travel allowance (LTA), house rent allowance (HRA), standard deduction on salaries, deductions of up-to `150,000 available under section 80C for specified investments, donations to charitable organizations, deduction for medical insurance premium, etc.
In case of individuals with business income, the option once exercised for a financial year shall be valid for that year and all subsequent years. Individuals who do not have any income from business or profession can exercise the option to avail lower tax rates on a year to year basis. Therefore, individual and HUFs would need to determine the tax liability under the existing tax rates vis-à-vis new scheme and then select the best option.
Tax on ESOPs for eligible startups
The Finance Bill 2020 has proposed to increase the turnover cap from `25 crore to `100 crore for eligible start-ups claiming tax holiday. Further, the window for claiming tax holiday is proposed to be expanded to three consecutive years in a block of 10 years from the current block of seven years.
As part of long-term incentive schemes, startups usually provide employee stock options (ESOPs) to retain the highly talented employees with an avenue to participate in the startup’s growth. ESOPs are taxable when the vested options are exercised by the employees.
However, at the time of exercise, the employees face a cash flow crunch as there is no inflow of income but there is a requirement to pay taxes on the accrued benefit.
To provide a relief to such employees, the Finance Bill 2020 has deferred the tax payment event from the exercise date to 48 months after exercise, cessation of employment or sale of shares, whichever is earliest. While this is a welcome step for employees in startups, similar issues are faced by employees of other companies (i.e. other than start-ups) also and it is hoped that the government would consider extending this benefit to employees in all companies.
Under the existing tax provisions, the contribution by the employer to an employee’s account in a recognized provident fund, approved superannuation fund or the National Pension Scheme is tax exempt provided the contribution to each fund is within the prescribed percentage contribution/amount. However, there is no combined upper limit for the total quantum that may be contributed by the employer.
The Finance Bill 2020 proposes to limit the tax exemption benefit where the contributions made by the employer under all these funds exceeds `750,000 in aggregate. Employees in high salary brackets may be impacted by this provision. The bill also proposes to tax the annual accretions from such funds on contribution in excess of `750,000 as perquisites.
Direct tax amnesty
Encouraged by the success of the indirect tax Sabka Vishwas (Legacy Dispute Resolution) scheme, a new direct tax amnesty scheme called ‘Vivad Se Vishwas’ has been proposed to reduce litigation. The scheme proposes full waiver of interest and penalty if the disputed tax amount is paid by 31 March 2020.
The scheme shall remain open till 30 June 2020, with some reduced benefits.
It is expected that many taxpayers will evaluate and avail this opportunity to close any pending litigation.
Current tax laws provide that the difference between the stamp duty value and the sale consideration of a property is considered as taxable income in case the stamp duty value exceeds the sales consideration by 5%. It is proposed to increase the tolerance limit to 10%. It is also proposed that the cost of immovable property acquired prior to 1 April 2001 shall not exceed the stamp duty value, if available, to compute capital gains.
The budget proposes to impose a withholding tax at the rate of 1% on the gross amount of sales or service by an e-commerce operator on payments made to a resident e-commerce participant (i.e. person selling goods and/or services on electronic or digital platform). Further, payments made to an individual or HUF e-commerce participant are exempt from withholding tax if the gross amount does not exceed `500,000 subject to furnishing of PAN/Aadhaar. In the absence of PAN/Aadhaar of the e-commerce participant, withholding tax rate at the rate of 5% shall be levied.
Remittances under LRS
The government has proposed to levy tax collected at source (TCS) at the rate of 5% (10% in case PAN/Aadhaar not furnished) on remittances of `7 lakh or more in a financial year under the liberalized remittance scheme (LRS) through an authorized dealer and on purchase of overseas tour packages.
Other key announcements
With a view to enhance the trust between the taxpayer and the tax collector and to nurture an atmosphere of mutual cooperation, the finance minister has announced the introduction of a taxpayer’s charter in the statute. The government has proposed to set up an ‘Investment Clearance Cell’ that will provide end-to-end facilitation and support, including pre-investment advisory, information related to land banks and facilitate clearances at Centre and state level. The government had in 2019 introduced an e-assessment scheme in order to ease the tax litigation process. Taking the process further, an e-appeal scheme for disposal of appeals by the Commissioner of Income Tax (Appeals) and e-penalty scheme has been proposed. One of the steps towards easing the tax compliances, the budget proposes to increase the turnover threshold from `1 crore to `5 crore for mandatory tax audit of persons carrying on business. This is based on the condition that cash receipts and payments do not exceed 5% of the total receipts and payments, respectively.
Most taxpayers tend to look at the budget with the narrow prism of amendments in tax provisions or policy announcements which have a direct, immediate and visible impact on their cash in hand. However, the government has set out its vision for improving the ease of living for all Indians through focused development in education, healthcare, infrastructure and industry. The taxpayers are, therefore, encouraged to be transparent in their approach and ensure proper and timely compliances. When seen in a comprehensive manner, there is surely much to look forward to for all stakeholders.
Shivani Goel contributed to this article.
Vikas Vasal is national leader, tax, at Grant Thornton India.