Hello everyone, hope you all are doing well. This blog focuses on exploring the unknown elements of the Union Budget 2020-21 and analyses impact of proposed changes in Tax on Indian economy. Nirmala Sitharaman (Finance Minister (FM)) played very safely in his debut budget last time and kept distance from crucial issues to serve justice to Indian economy. As we all know that the Indian economy is in a deep funk, in a downward spiral of falling consumption, investment and employment, and rapidly decelerating GDP growth.

The problem, evident for several years now, has been created by a collapse in consumer demand, the bedrock of the country’s economy. All major economic indicators are at their multi-year lows; the GDP growth is at six-year- low; full year GDP forecast now stands at 5 per cent way below its 2018-19 tape; consumer confidence is at its lowest in five year and unemployment rate of 6.1 per cent is at a 45- year high. The government too is running on a tight fiscal situation with lesser than expected tax collections and disinvestment collections.

Last year FM has announced a slew of incentives for the economy. A tax cut for corporates and new manufacturing companies, reforms in Goods and Service Tax law, capital infusion for PSU banks and setting up a fund for real estate and infrastructure. However, the economic indicators have not shown signs of growth revival to lift up the current morass of the economy. The call of the general public, economists and industrialists is to revive the demand in the economy and work effectively on ease of doing business.

I am expecting that this Budget 2020 is actually a path breaking budget and not inspired from her illogical statements made during last year on slowdown in automobile industry wherein she quoted reason that “the mindsets of millennial, who now prefer to have Ola or Uber rather than committing to buying an automobile”. In this background, Let’s start clause wise analysis of Direct Tax Amendments in Budget 2020.

1. Budget 2020 for Common People

Coming first to the middle-class people of Indian Economy, let’s discuss proposed Income Tax Structure which is little more complicated then earlier one. Under the proposed tax regime Individuals and HUF will be given two options to opt for taxation, one is current scheme with no changes and other by way of option Section 115 BAC:

i. Option (1): Current Scheme:

Individuals having less than 60 years age and HUF Individuals having age more than 60 years but less than 80 years age Individuals having age more than 80 years
Total Income Tax Total Income Tax Total Income Tax
Upto Rs. 2,50,000 Nil Upto Rs.3,00,000 Nil Upto Rs. 5,00,000 Nil
Rs. 2,50,001 to Rs. 5,00,000 5% Rs. 3,00,001 to Rs. 5,00,000 5% Rs. 5,00,001 to Rs. 10,00,000 20%
Rs. 5,00,001 to Rs. 10,00,000 20% Rs. 5,00,001 to Rs. 10,00,000 20% Above Rs 10,00,000 30%
Above Rs 10,00,000 30% Above Rs 10,00,000 30%

Note 1: Many of us heard in Budget Speech and on News channel that no tax payable up to the income of Rs.5 Lakhs, let me clarify that first. If your NET TAXABLE INCOME i.e. after reducing all deductions (Section 80C, 80D etc) and set off of losses (Interest on House Property) remains below 5 Lakhs then under the provisions of Section 87A a rebate of amount equals to income tax or Rs.12,500/- whichever is lower offered to tax payer as relief which results in Nil Tax. But if your NET TAXABLE INCOME after reducing all eligible deduction falls beyond 5 Lakhs, suppose Rs,5,00,001/- then you will not get any benefit of this rebate and you would be liable to pay tax as per the above slab. That means if you earn 1 Rs. more than 5 Lakh, then be ready to shell out excess Rs.12,500/- in the name of Tax.

Note-2: In short there are no changes in present Tax provisions for Individual and HUF except with the additional option of opting Concessional Tax Rate scheme discussed hereinafter.

ii. Option (2): Proposed Concessional Income Tax Rate Scheme (Optional):

Total Income Tax
Upto Rs 2,50,000 Nil
From Rs 2,50,001 to Rs 5,00,000 5%
From Rs 5,00,001 to Rs 7,50,000 10%
From Rs 7,50,001 to Rs 10,00,000 15%
From Rs 10,00,001 to Rs 12,50,000 20%
From Rs 12,50,001 to Rs 15,00,000 25%
Above Rs 15,00,000 30%
Conditions to Satisfy
a. No set off of any loss carried forward or depreciation from previous years if it is attributable to Deductions and allowances mentioned under this section. Also, this loss won’t be carried forward in future year, just forgot it.

b. House Property loss (Interest) can be set off with House Property Income (Rent) only NOT by any other head such as Salary, business etc.

c. File Income Tax Return on or before due date.

d. Business person can opt out from this scheme only once in a lifetime.

e. Person should forego following allowances and deductions:

i. Any Deduction u/s 80C (LIC, Tution fees etc), 80D (Mediclaim etc), 80G (Donation), 80GG (Rent) or any other similar deduction EXCEPT Section 80CCD (National Pension Scheme)

ii. Standard Deduction of Rs.50,000/- (S.16)

iii. Interest on Housing Loan (Refer Note)

iv. Entertainment Allowance and Professional Tax

v. Leave Travel Concession & House Rent Allowance

vi. Free Food and Meal Vouchers

vii. Allowance for income of minor which is upto Rs.1500/-

viii. any special allowance allowed on basis of actual expenditure (Section 10(14),

ix. Additional Depreciation

x. Various Business Deduction u/s 32AD, 33AB, 35, 35AD, 35CCC, 80IA, 80IB, 80IAC etc.

xi. Allowances to MPs/MLAs

Key Points:

1. Section started with the wording that “Notwithstanding anything contained in this Act…” which means provisions of this section supersede all the other provisions of the Act. One may conclude that rebate u/s 87A of Rs.12,500 for person having Income less then 5 Lakhs will not be available if any taxpayer opts under this scheme because this section overrides the act. This way her statement of No Tax up to Income of Rs. 5 Lakhs becomes annulled. FM should have introduced proviso under proposed section or similar amendment in Section 87A to allow the rebate.

2. Interest on Housing Loan for self-occupied property not allowed for deduction under this scheme, however if any loss on account of interest arises from property rented out, such loss will be allowed to carry forward but this will be allowed to set off in future year only with House Property Income (Rent) until and unless you opt out of this scheme.

3. What are the allowances allowed under this Scheme?

a. Transport Allowance

b. Conveyance Allowance

c. Any Allowance granted to meet the cost of travel on tour or on transfer

d. Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

However, it is not clarified that to what extent such allowances will be allowed, I am presuming this will be allowed to the extent of the actual expenditure.

4. This scheme can be availed by Salaried Employee or Business person both but they have to file their Income Tax Return on or before due date. However, there is some differentiation in Salaried person and Business Person under this scheme. Salaried person can anytime opt in or opt out of this scheme multiple time, however a person who earns business income if opt out once from this scheme he will not be able to claim this scheme in any of the future year. He can opt in under this scheme in future only when he has no Business Income. Doors for this scheme will be locked for him until his business cease to exist.

5. Proposed section specifically deals with business income and not with the Income from Profession. Does that mean benefits of this section will not be available to the persons earning Income from Profession?

While introducing this scheme during budget speech FM told that this is new and simplified personal income tax regime and common will be less dependent on Tax Professionals. From Bird’s eye view of the above provision it is amply clear that above provision put into dilemma to common people in order to choose which train they need to catch. Everyone will be dependent on the professional in order to decide the same. If you choose to be part of the new income tax regime, you will pay lesser income tax in view of government but you won’t be able to claim any rebate or exemption. This scheme demotivates investment and saving among common people by withdrawing Income Tax Deduction on such options. In my view FM should have kept it more simplified and flexible. Presenting scheme for tax benefits of 3% of tax payers in India should be kept actually beneficial, in my view and analysis given below very few people will get rewarded by this scheme.

Particulars
Business
Salaried
Business
Salaried
With Investments in 80C and 80D
Without Investments in 80C and 80D
Option-1
Option-2
Option-1
Option-2
Option-1
Option-2
Option-1
Option-2
Gross Total Income
800000
800000
800000
800000
800000
800000
800000
800000
Deductions and Allowances (HRA, Professional Tax, LTA etc)
0
0
-150000
0
0
0
-150000
0
Standard Deduction
0
0
-50000
0
0
0
-50000
0
80C
-150000
0
-150000
0
0
0
0
0
80D
-25000
0
-25000
0
0
0
0
0
Net Taxable Income
625000
800000
425000
0
800000
800000
600000
0
Tax Payable
37500
47500
0
47500
72500
47500
32500
47500
Tax Benefit / (Loss)
-10000
-47500
25000
-15000

Above calculation is just an illustrative one considering the possibility that the person has utilised his deduction under 80C and 80D to the full extent. There may be certain scenarios wherein tax payer will get benefit too under proposed scheme but in my view probability of person falling beneficial under proposed scheme is rare and depends on various permutation and combination. On preliminary overview of certain calculations, I found this proposed regime more beneficial to Business person as compared to Salaried Person because there are various deductions and allowances taken away from salaried person to opt in for this scheme as compared to the business person.

iii. What FM failed do for Aam Aadmi?

  • If JNU and other universities fees can be hiked up in wake of inflation then limits of various deductions and allowances can also be increased to help the common people.
  • Limit of ₹1 lakh for capital gain deduction is too low as many individuals are holding equity mutual fund investments for many years. To continue incentivising retail investments into equity MFs, the government could have consider increasing the limit of ₹1 lakh to ₹2 lakh.
  • Government can increase limit of investment by mobilising public savings through section 80C.

Well there are N no.’s of suggestion one can suggests but this will not help anymore and result in unnecessary exercise. So, let’s move ahead and discuss other hidden elements of the Budget.

2. Other amendments affecting Individual’s

  • New section 194K introduced by way of Budget which allows deduction of tax on redemption of Mutual funds @ 10% from the income earned by the investor in excess of Rs.5000/- by withdrawing Mutual Funds. TDS will be deducted on Profit amount and not on redemption value. This will help Income Tax Department to track those people who are not declaring gains on redemption of mutual funds.
  • In order to mitigate the Tax planning of employees with high salary who design their salary package in such manner where a large part of their salary is paid by the employer to various funds, the Finance Bill has proposed a cap of Rs 7.5 lakh in a financial year on employer’s contribution to NPS, superannuation fund and recognised provident fund and any excess contribution above that limit will be taxable in the hands of the taxpayer. For example, if basic salary of an employee is Rs 50 lakh per annum, then his employer contributes Rs 6 lakh to EPF (12% of basic), Rs 5 lakh to NPS (10%) and Rs 2.5 lakh (5%) to a superannuation fund. In total, the employer contributes Rs 13.5 lakh to the three schemes, which is exempted from income tax. But once new rules become applicable, Rs 6 lakh (Rs 13.50 lakh minus Rs 7.50) will be added to the taxable income of the employee.
  • Deduction of TDS on products sold through E-commerce Platforms (Amazon/Flipkart) (Section 194-O) In order to widen the Tax base FM announced that E-commerce operator (Amazon/Flipkart etc) which facilitate sale of good/services through their digital platform required to deduct TDS at 1% on GROSS AMOUNT OF SUCH SALES OR SERVICE OR BOTH if such amount exceeds Rs. 5 Lakhs. This amendment is going to hurt deep for all those small and medium sized traders who are selling products/services on various e-commerce platforms. They are already undergoing deduction of TDS under GST law from their payments and now TDS under Income Tax law also introduced. It is pertinent to note that proposed section uses word “Gross amount of such Sales” which means e-commerce operator will require to deduct TDS on GST portion of sales and as well as on Commission and affiliation portion also which e-commerce operator himself will withheld. Seller is not holding any amount on account of GST, Commission and advertising fees but TDS @ 1% will be deducted on these amounts also in view of Gross Sales. Let me take you through the practicality and difficulty arises due to this:

For an Example: A trader sold goods of Rs.10,00,000/- on Amazon

Sale Amount Rs.10,00,000/-
GST (18%) Rs. 1,80,000/-
Total Receivable by Seller (A) Rs.11,80,000/-
Amazon Commission (15%) (B) -Rs.1,77,000/-
Various affiliation, shipping and Advertisement Fees (5%) (C) -Rs.59,000/-
Proposed TDS @ 1% of Gross Sales i.e. Rs.11,80,000/- -Rs.11,800/-
Net Receivable in the hands of the Seller (A-B-C-D) Rs.9,32,200/-

Above situation will lead to huge working capital crises at the end of Seller who is already suffering from burden of various compliances just because he is selling products online. Also, if his turnover crosses 1 Crore/5 crore then he is also required to deduct TDS of e-commerce operator (Amazon/Flipkart) on these commission and advertisement fees. E-commerce operator generally reimburse this TDS deduction on submission of TDS certificates after the end of Quarter resulting in to blockage of working capital for more then 3 Months.

  • A deduction for interest payments up to Rs 1,50,000 is available under Section 80EEA on satisfying certain conditions. This deduction is over and above the deduction of Rs 2 lakh for interest payments available under Section 24 of the Income Tax Act. Under proposed budget this scheme is extended up to 31.03.2021
  • Currently, while taxing income from capital gains, business profits and other sources in respect of transactions in real estate, if the consideration value is less than circle rate by more than 5 percent, the difference is counted as income both in the hands of the purchaser and seller. FM has increased such limit from 5% to 10%. It would have been much better if FM would have tried to remove basic problem of this double taxation which she said in budget speech quoting that “the difference is counted as income both in the hands of the purchaser and seller”
  • Tax Audit limit increased to 5 Crore from 1 Crore where aggregate of all receipts and payments in cash does not exceed 5% of such receipts/payments. We all know how much Indian’s are dependent on cash economy and inserting such conditions prevalent for increased audit limit will help very few tax payers. No such relaxation for professionals.
  • Form 26AS apart from showing TDS entries will now reflects multiple information in respect of a person such as sale/purchase of immovable property, share transactions etc
  • Income Tax Returns of company can now be verified by person other then Directors also.
  • Change in Due dates of Audit and Income Tax Return Filing:
Due date of Income Tax Return of Audited Tax Payers (Section 44AB, 44ADA, 115JB etc) 31st October
Due date of Tax Audit One month prior to due date of Income Tax Return Filing i.e. 30th September

CA’s please fasten up your seat belts, Nirmala Tai is taking you on a ride which you have imagined never before.

3. Vivad se Vishwas Scheme (No Dispute but Trust Scheme)

Under the proposed ‘Vivad Se Vishwas’ scheme, a taxpayer would be required to pay only the amount of the disputed taxes and will get complete waiver of interest and penalty provided he pays by 31st March, 2020. Those who avail this scheme after 31st March, 2020 will have to pay some additional amount. The scheme will remain open till 30th June, 2020. Taxpayers in whose cases appeals are pending at any level can benefit from this scheme.

4. Concessional Tax Rate for Co-operative Societies:

FM based on the representation from various stakeholders provided option for concessional tax rate of 22% to resident Co-operative Societies on similar line as given for domestic companies in Taxation Laws Ordinance 2019. I wish she could have listened to representations of various LLP’s and Partnership Firm. While the government has conferred a tax cut on corporates and manufacturing companies, the other forms of business enterprises still pay high tax at 30%. There are MSMEs consisting of partnership firms and Limited Liability Partnerships (LLPs). The FM could have reduced the tax rate for these business enterprises also to create a level playing field among MSMEs.

5. Significant amendments under Budget 2020 for Non-Residents:

This part deals with the two significant changes proposed but not forms part of Budget Speech with respect to residency status and taxability of Income of Non-residents.

i. Changes with respect to Residency Status

Present Conditions for Resident Proposed Conditions for Resident
He/She is in India for 182 days or more during the financial year.

OR

If he/she is in India for at least 365 days during the 4 years preceding that year AND at least 60 days in that year (182 days if you take job outside).

He/She is in India for 182 days or more during the financial year.

OR

If he/she is in India for at least 365 days during the 4 years preceding that year AND at least 60 days in that year (120 182 days if you take job outside).

Note:

If one doesn’t satisfy above conditions then he/she will be considered as Non-Resident. Under present regime If a person who is on job abroad will be treated as Non-Resident if he is in India for less than 182 days, but now FM reduced vacation time in India for NRI from 182 days to 120 days. So now if you are doing job abroad and stays more then 120 days in India your NRI status will be taken away from you. It is important to note that various media houses claiming 240 days condition for being NRI is incorrect, based on Finance Bill correct days to stay outside India for being Non-resident is (365 Days-120 Days) = 245 Days.

ii. Changes with respect to Taxability of Income of NRI

FM has introduced below amendment in definition of Residency (Section 6) which will be going to affect taxability of NRI significantly. Here is the proposed law:

“(1A) Notwithstanding anything contained in clause (1), an individual, being a

citizen of India, shall be deemed to be resident in India in any previous year, 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”

It states that If any person who is citizen of India and not liable to tax in any other country or territory by any specified reason then he will be treated as resident of India despite of his residency status NRI or whatever. It is important to note that once he becomes resident under this clause his/her global income will be taxed in India.

Well this is the interpretation of amendment mentioned in Bill, but later in press conference addressed by Mr. Ajay Bhushan he stated that Some people are residents of no country. They may be staying in different countries for certain number of days. So, if any Indian citizen is not a resident of any country in the world, he’ll be deemed to be a resident of India & his worldwide income will be taxed. This implies that Indians who are residents of any other country will not come under this provision, as they will be paying income tax in their country of residence as per laws of that country. FM gave explanation behind such amendment that there are many globe trotters who spend few days in different countries, but do not have residential status in any country. As a result, such persons are not liable to pay income tax anywhere.

Anyways Finance Bill and statement of Revenue Secretary led to much bigger confusion that whether NRI whose abroad income is not taxable in abroad will be require to have citizenship of such country also in order not become taxable in India? I guess this bullet launched from FM’s guns hits into the chest of wrong person.

6. Definition of Resident but Not Ordinarily Resident (RNOR) amended:

Present Conditions Proposed Conditions
If you have been an NRI in 9 out of 10 financial years preceding the year.

OR

You have during the 7 financial years preceding the year been in India for a period of 729 days or less.

If you have been an NRI in 7 out of 10 financial years preceding the year.

 

RNOR status is boon for those people who have just returned back to India. There Indian Income is taxed in India in such cases. You are not required to pay any taxes up to 3 years on any income earned abroad.

7. Removal of Dividend Distribution Tax (DDT)

The Clamour for removal of DDT had been on for a while due to cascading taxation. India was levying total 20.56 per cent DDT on a company declaring dividends. This is over and above the corporate tax that companies pay on their taxable profit. The decision is likely to benefit small as well as non-resident taxpayers. Also doing away with this tax can give a major push to investment.

Under present scenario Domestic companies are required to pay DDT on dividend distributed to the investors and such dividend is exempt in the hands of investors under Section 10(34) of the Act. But if such dividend income exceeds Rs. 10 Lakhs then receiver is required to pay tax at the rate of 10% on such dividend income. Under proposed amendment such Dividend will no longer be brought to tax under DDT and now it will be taxed in the hands of receiver as per their applicable tax rate. However, if receiver has incurred any interest expense in order to earn such dividend then deduction of interest will be allowed as deduction u/s 57 of the Act which will not in any case goes beyond 20% of the Dividend earned. Further Company distributing Dividend now required to deduct TDS at the rate of 10% if such dividend payment exceeds Rs. 5000/-.

8. Amendments with respect to Charitable Trust and Societies

There is various amendment with respect to charitable trust and societies which will be increasing more compliances on their part. Certain major points out of the same are as under:

  • an entity approved, registered or notified under clause (23C) of section 10, section 12AA or section 35 of the Act, as the case may be, shall be required to apply for approval or registration or intimate regarding it being approved, as the case may be, and on doing so, the approval, registration or notification in respect of the entity shall be valid for a period not exceeding five previous years at one time calculated from 1st April, 2020.
  • an entity already approved under section 80G shall also be required to apply for approval and on doing so, the approval, registration or notification in respect of the entity shall be valid for a period not exceeding five years at one time.
  • an entity making fresh application for approval under clause (23C) of section 10, for registration under section 12AA, for approval under section 80G shall be provisionally approved or registered for three years on the basis of application without detailed enquiry even in the cases where activities of the entity are yet to begin and then it has to apply again for approval or registration which, if granted, shall be valid from the date of such provisional registration. The application of registration subsequent to provisional registration should be at least six months prior to expiry of provisional registration or within six months of start of activities, whichever is earlier.
  • deduction under section 80G/ 80GGA to a donor shall be allowed only if a statement is furnished by the donee who shall be required to furnish a statement in respect of donations received and in the event of failure to do so, fee and penalty shall be levied.
  • similar to section 80G of the Act, deduction of cash donation under section 80GGA shall be restricted to Rs 2,000/- only.

9. Amendments with respect to Start-ups

  • ESOP is a significant component of compensation for start-up employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term. Under Proposed budget the burden of taxation on the employees eases by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest
  • The existing provisions of section 80-IAC of the Act provide for a deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible start-up for 3 consecutive years out of 7 years, at their option, subject to the condition that the eligible start-up is incorporated on or after 1st April, 2016 but before 1st April, 2021 and the total turnover of its business does not exceed 25 crore rupees. Under proposed budget

(i) the deduction under the said section 80-IAC shall be available to an eligible start-up for a period 3 out of 10 Years

(ii) Turnover limit increase to 100 Crores from 25 Crores

10. Other Amendments in Budget 2020

  • Penalty for Fake Invoices (Section 271AAD) : In past few months since introduction of GST law several cases of fraudulent input tax credit (ITC) claim have been caught by the GST authorities wherein invoices issued without actual supply of goods or services. In order to deal with such nuisance’s New penalty provision inserted under the law which will levy penalty of sum equal to the aggregate amount of such false entries or omitted entries which will be caught during proceeding under the Act. This section enables AO to levy penalty on such person also who causes such person to make such entry in any manner. For an example, If Mr. A who runs roadside shop takes GST no. and issued fake invoice of Rs. 1 Crore then under this section penalty of Rs. 1 Crore will be levied on him. I am wondering that how government will collect penalty of a Crore from person who doesn’t have actual amount of transaction entry reflecting in books.
  • Provisions of Section 143(3A) provides for scheme of E-assessment for greater efficiency and transparency. Under proposed budget the word “Section 144” also now inserted under this section which means now Best Judgement Assessment can also be done by way of E-assessment. It is surprising to note that last year various Tax Officers already did E-assessment in cases of demonetisation under Section 144 by way of E-assessment. Will such E-assessment be held null and void since there was no provision under act at that time which enables officers to do e-assessments.
  • FM further proposed to announced Faceless appeals in terms of Faceless assessment. (Section 253)
  • Under existing provisions of the Act there is no condition on deposit of 20% of Tax demand before proceeding for appeal before Income Tax Appellate Tribunal (ITAT). This is now amended that ITAT may grant stay of demand based on merits of the case subject to the condition that the assessee deposits not less than 20% of the Tax Demand. (Section 254)

11. Conclusion

Amidst all these challenges, the government has to deliver a path- breaking budget that can help the economy fall back on track and follow a path of sustainable growth to be able to realise the dream of $5 trillion economy. In my view FM honoured the commitment of reviving the economy in her best ways. From the Income Tax Front, FM truly deserves huge round of applause for removing DDT and taking some bold reforms, however I expected that this budget could be more focussed towards “Making me Easy” and not on “Making me Busy”. There are certain amendments made in GST law in last budget which is not notified yet, I hope after finishing this Budget Government will look into those amendments to save people from further harassment of Tax Officers. I hope anomalies in the GST law would be redressed soon and not ignored by the similar kind of statement which she made on Onion Prices crises by stating that “I don’t eat onions and garlic that much. So, don’t worry. I come from a family that doesn’t care much about onions”.

Disclaimer: The Contents of the document are solely for information purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Comments on misinterpretation and mistakes are wholeheartedly invited.

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