Union Budget 2020: Direct Tax Highlights

UNION BUDGET 2020 HIGHLIGHTS

The analysis of Budget is divided into 2 major categories: (a) Direct Tax (b) Indirect tax with major focus on the Amendment proposed for the Direct Tax.

The budget was very high on hopes for individual taxpayers as the hopes for tax relief was very high. The major themes for this budget was aspirational India, economic development and building a caring society.

The budget speech was longest speech ever by any finance minister but still Nirmala Sitharaman act failed to energize the stock market as the market reacted negatively. In this article we will analyze Direct tax proposal of the government which are grouped under various categories as follows:

(1) Individual tax payers

(2) Corporate

(3) NRIs

(4) Foreign

(5) Others

INDIVIDUAL TAX RATES

The Budget has given new option to the taxpayers to opt for lower slab rate if they forgo any deductions or exemption available under the Income tax Act, 1961. The new rates are as follows:

S.No	Income (Lakh)	Old Slab rate (%)	Income	New Slab rate (%)
1	2.50L-5.0L	5	2.50-5.0L	5
2	5.0-10L	20	5.0-7.5L	10
3	10L & Above	30	7.5-10L	15
4			10-12.5L	20
5			12.5-15L	25
6			Above 15L	30

The Finance Bill provides an option to the taxpayers to exercise the new option of availing new rates or continue under the old regime.

The major change is that while going for new rates the exemptions under section 10 of the Income Tax Act, 1961, housing interest rate and principal deduction under Section 24B and deductions available under chapter VI-A cannot be availed. Hence no such benefit will be available under the new system.

We can understand the same with the help of an example:

(1) Mr. Modi has gross income of Rs. 8.8L with investments of Rs. 65000 under 80C,

Now, as per present system of tax he will be liable for:

Gross Total

Salary Income	8,80,000
Standard Deduction	50,000
Gross Total Income	8,30000
Less: Deduction u/s 80C	65,000
Total Income	7,65,000
Upto 2,50,000	0
2,50,000-5,00,000	12,500
5,00,000-7,65,000	2,65,000 * 20%= 53,000
Net Tax Payable	65,500 (without cess)

Under the New System

Gross Total Income	8,80,000
Less: Deduction u/s 80C	0
Total Income	8,15,000
Upto 2,50,000	0
2,50,000-5,00,000	12,500
5,00,000-7,50,000	2,50,000 * 10%= 25,000
7,50,000- 8,15,000	65,000 * 15%=9,750
Net Tax Payable	47,250 (without cess)

Thus from above example it is clear that the new change will be beneficial and would be more to people who are not doing any big saving to claim deduction or exemption. Overall a small step in the right direction for individual taxpayers as it would reduce the compliance also for them.

DEPOSIT INSURANCE LIMIT HIKED TO RS. 5 LAKH

The other big announcement made was with respect to Deposit insurance of bank deposit which will be increased to Rs. 5l from Rs. 1L, which was set in May, 1993.

The Deposit Insurance and Credit Guarantee Corporation will see the limit to be increased. It comes as big relief for depositors given the recent case of Punjab and Maharashtra Cooperative Bank failure to pay and subsequent RBI action on depositor and other issues. For Banks the increase would mean more premium payment to insurance co. Hopefully it will bring more relief to the depositor but the real issue is the Financial Resolution and Deposit Insurance Bill, 2017, the real devil for the depositor.

Definition of Non-Resident changes and taxability now

The Third major change is the definition of Non-resident and the status of taxability when you are not taxed anywhere in the world. Now Non-resident is a person who has stayed out of India for a period of not 182 days but 246 days. Thus a person has to stay bit longer to claim the status of Non-resident otherwise as a resident and would be liable to be taxed for both Indian as well outside India income.

Taxability of Non-Tax citizen anywhere in the world

Further to the above if a person is a citizen of India and is not liable to tax in any foreign country because of residence, then such person would be a resident of INDIA and his global income will be liable to tax in India.

Thus the government is widening the coverage of resident and targeting Indian citizen who are residing or doing arrangement wherein they don’t pay tax anywhere would be liable to tax in India.

Exemption to Non-Resident from Income Tax Return

Exemptions to non-resident from filling Income Tax Return under 139(1) by amending Section 115A which now provides that if the Non-resident total income includes royalty or fees for technical services (FTS) then he is not required to file the return. Current provisions provides relief  only in case of income via Interest or dividend and TDS has been paid on it.

ETF for investment in G-Sec for retail investor

Retail investors now has new door for investment via G-Securities ETF after the success of Bharat Bond ETF , which opened the scope of further issuance. 

AMENDMENT PROPOSED FOR CORPORATE

Dividend Distribution Tax

Currently, dividends distributed by a company are subject to Dividend Distribution Tax (DDT) at an effective rate of 20.56%. Such DDT is levied on the post-tax income of the company, i.e. after the company has already suffered corporate tax on its profits. Since DDT is a tax obligation of the distributing company (i.e. it is not in the nature of tax deduction at source), such DDT is not available as a credit to the shareholder. Dividend so received from the distributing company is exempt from tax in the hands of shareholders EXCEPT few having dividend income of Rs. 10L.

Now the same is being scrapped for companies and will be taxed after 31.03.2020 in the hands of Shareholder but still the obligation is to deduct TDS is on the Company, making compliance burden again.

Decriminalizing of Companies Act

It is proposed that the Government will continue its efforts to remove criminal liability under the Companies Act, 2013. The efforts will be in line with govt Ease of Doing business efforts. Steps are already being taken with further new steps in new FY will pave the way for such Decriminalizing of Companies Act provisions especially those relating to Director and officers in default.

INVESTMENT CLEARANCE CELL

There has been a proposal to set up an Investment Clearance Cell through a portal 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. This initiative is in line with continuous Government efforts on “ease of doing business” in India. This is to help entrepreneur to clearance and information available with speed and hassle free manner.

ESOP and Their Taxability

Start-ups and corporate rely on ESOP to attract and retain talents but the same ESOP is becoming a cause of burden as the Tax provisions are complicated. But the Bill has made life easy as the ESOPs will be taxed earlier of 5 years or leaving the Company or sell of shares.

Also, Section 80-IAC of the Income-tax Act relating to special provision in respect of specified business. It provides for deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of Ten years at the option of the assessee and the total turnover of its business does not exceed 100 crore rupees. Thus the turnover limit for start-ups is increased to Rs. 100 Crore from 25 Cr and also the period to ten years.

These two measures are very positive for the start-up space.

MODIFICATION OF THE DEFINITION OF “BUSINESS TRUST”- Equal treatment with Listed Units

The definition of Business trust under section 2(13A) of the Income Tax Act, 1961 to mean a trust registered as an Infrastructure Investment Trust (InvIT) or a Real Estate Investment Trust (REIT) under the relevant regulations made under the Securities and Exchange Board of India (SEBI) Act, 1992 and the units of which are required to be listed on a recognised stock exchange in accordance with the relevant regulations.

Now the amendment proposed to do away with the requirement of the listed of such trust unit on stock exchange. Thus it will provide uniformity and equal status to private trusts as well with respect to Taxation also. Section 115UA benefit will be available to unlisted units also now.

SURCHARGE RATES FOR FY 20-21

S.No	Person Type	Net Income	Rate (%)
1	Individual/HUF/AOP/BOI	Exceeds 50L upto 1Cr	10
2	Individual/HUF/AOP/BOI	From 1 Cr to 2 Cr	15
3	Individual/HUF/AOP/BOI	From 2 Cr to 5 Cr	25
4	Individual/HUF/AOP/BOI	Beyond 5 Cr	37
5	Firm/LLP/Cooperative Society/Local authority	Exceeds 1Cr	12
6	Domestic Company	1 to 10Cr	7
7	Domestic Company	Exceeds 10Cr	12
8	Foreign Company	1 to 10 Cr	2
9	Foreign Company	Exceeds 10Cr	5

Sovereign Wealth Fund and Abu Dhabi Investment Authority Certain Income Exemption

Section 10 of the Income Tax will provide for exemption of certain income in the nature of Dividend, interest or Long term Capital gain arising from an investment made in India before 31.03.2024 and held for three years for equity and debt investment and such investment should be from certain specified business.

The benefits available to an assessee having profits and gains from the business of developing and building affordable housing projects subject to conditions be allowed deduction of an amount equal to 100% of profit and gains from such business. The conditions being that the such business need to be approved form competent authority during the period from 1st June, 2016 to 31st March, 2021. Thus extending the benefits to such projects to one more year under Section 80-IBA of the Act.

Electricity Generation companies under Manufacturing definition

The amendment of Section 115BAB to include generation of electricity as manufacturing as the new manufacturing domestic companies  setup on or after 1^st Oct, 2019 and which commences manufacturing or production on or before 31^st March, 2023 and do not avail any concessional deductions or incentives may pay tax at rate of 15%. The same section now will provide the benefit by including the under the definition of manufacturing the “business of generation of electricity”.

TDS DEDUCTION BY E-COMMERCE OPERATORS FOR SALES AND SERVICES THROUGH THEIR PORTAL.

New section 194-O is proposed to be inserted whereby ‘e-commerce operators’ will be required to deduct tax at source @1% of gross amount of sales and services facilitated or provided by them through their digital or electronic platform. Individual or HUF e-commerce participant having less than 5lakhs sales and his PAN is furnished shall be not liable.

Cooperative Societies

Cooperative Societies via new section 115BAD will be taxed at the concessional tax rate of 22% without availing special exemptions as compared to current 30%.

The taxability of Dividend in the hand of the receiver is increased to Rs. 5000 from Rs. 2500.

Tax Audit Limit

The Tax Audit Under section 44AB limit is now increased to Rs. 5 Cr to ease small medium enterprises which were required to have such audit conducted.

Intellectual Property Rights

A digital platform is proposed to be set up to facilitate seamless application and protection of intellectual property rights.

Further, a centre of Institute of Excellence, is proposed to be established that would work on the complexity and innovation in the field of intellectual property.

Real Estate Circle rates and Stamp Duty Variance

The Bill proposes to increase exemption by providing for a variance of 10% between the actual consideration and the circle rate as compared to the current 5%. Hence a big relief for property seller for computation of profit and gains on sale of immovable property.

Taxpayer’s Charter in the Act.

A new section 119A in the Act by which the Board will declare a Taxpayer’s Charter and issue such orders, instructions, directions or guidelines to other income-tax authorities as it may deem fit for the administration of Charter.

Disclaimer

The article intent is to bring brief highlights of the major proposed changes in the Direct Tax laws. The article is prepared with great care and caution, still in case of any error the author would love to ratify the same. Also any opinion or feedback would be highly appreciated.