Deepa Bakhru

Deepa Bakhru

The Finance Minister presented the Finance Bill, 2020 in the Lok Sabha on 1 February 2020, accompanied by the longest ever budget speech. On an overall basis, the government’s focus appeared to provide ease of living and to promote investments in to India. Accordingly, the entire Budget was woven around three prominent themes of Aspirational India, Economic development and Caring society.

Given the recent reduction in the tax rates provided by Taxation Law (Amendment) Act, 2019 to corporate taxpayers, it was expected that the government would turn its attention to exemption of long term capital gains tax, extension of the sunset clause for exemption in case of Special Economic Zone (SEZ) units and abolition of dividend distribution tax for attracting investments into India. While there were no announcements for exempting long term capital gains arising on transfer of listed securities and SEZ units, the Budget has proposed certain welcome changes for corporate taxpayers including abolition of dividend distribution tax. The key changes proposed are briefly discussed below:

Abolition of Dividend Distribution Tax (DDT)

Currently, companies are required to pay DDT on the dividend paid to shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax payable by the company on its profits. In order to increase the attractiveness of the Indian Equity Market, it is proposed to remove the DDT. The dividend income would be taxable in the hands of the shareholders. This is a paradigm shift in the taxing provisions relating to dividend.

The deductions that are permissible from such dividend income are as under:

  • Interest payment up to 20%
  • Redistribution of dividend equivalent to dividend received within the prescribed time limit

Further, withholding tax provisions shall also apply.

Rationalisation of tax holiday for startups

The Finance Minister acknowledged that start-ups have emerged as engines of growth for our economy.

Currently, eligible start-ups with turnover of up to INR 25 crores are allowed deduction of 100% of profits for 3 consecutive assessment years, out of 7 years. In order to extend this benefit to larger start-ups, it is proposed to increase the turnover limit to INR 100 crores. Also, considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, the period of eligibility for claim of deduction is proposed to be increased from the existing 7 years to 10 years.

Rationalization of definition of Royalty

Currently, consideration received for sale, distribution or exhibition of cinematographic films is not considered as royalty and accordingly not taxable in case of a foreign company. Further, withholding tax is not applicable on such income in case of Indian residents. To align the definition of royalty with tax treaties, it is proposed to omit the said exclusion from the definition of royalty.

Deferral of Significant Economic Presence (‘SEP’)

The applicability of SEP has been deferred to Assessment Year 2022-23, as the government has not prescribed thresholds, pending the G20 OECD reports[1]. Further, the scope of SEP has been proposed to be expanded to cover systematic and continuous soliciting of business or engaging with such number of users as may be prescribed. The reference to ‘digital means’ in the current provision has been deleted.

Income attributable to business connection in India

It is proposed to expand the scope of income from business connection to include the income from advertisement that targets Indian customers, or income from sale of data collected from India or income from sale of goods and services using such data collected from India.

Exemption for a non-resident from filing of Income-tax return

Currently, non-residents receiving certain interest and dividend income are not required to file tax return in India. It is proposed to extend such exemptions to foreign entities earning income in the nature of royalty or fees for technical services return if tax has been deducted on gross basis under the provisions of the Income Tax Act, 1961[2] (‘the Act’).

Withholding tax and Tax Collected at Source (‘TCS’) provisions

  • Withholding tax rate proposed to be reduced to 2% on payment to resident taxpayers in the nature of fees for technical services (not being a professional services);
  • The proposed period for applying concessional withholding tax rate at 5% for investment made in Indian denominated bonds and/or Government securities by non-residents has been extended till 30 June 2023. Further, the said concessional rate has also been extended to investment in municipal bonds;
  • To widen and deepen the tax net by bringing participants engaged in electronic commerce within tax net, it is proposed to introduce withholding tax at 1% on e-commerce transactions (5% in case of non-availability of Permanent Account Number);
  • TCS at the rate of 0.1% is proposed to be applicable in case of sale of goods[3]
    • To be applicable to sellers whose gross business sales / turnover / gross receipts in the immediately preceding financial year exceeds INR 10 crores
    • In case of non-availability of PAN/ Aadhaar, TCS rate shall be 1%
    • Further, TCS shall not be applicable if the said transaction attracts TDS liability

Concessional tax scheme

  • New domestic power companies (incorporated on or after 1 October 2019) to be eligible for reduced base corporate tax rate of 15% (plus surcharge and cess), provided electricity generation is commenced by 31 March 2023;
  • It is further proposed to amend the provisions to not allow deduction under any provisions of Chapter VI-A (other than section 80JJAA or section 80M of the Act). The corporate taxpayers opting for reduced corporate tax rate shall not be eligible to claim deduction of expenses incurred in relation to Corporate Social Responsibility under section 80G of the Act.

Key Procedural Changes

  • To facilitate pre-filled income tax return forms, the due date for filing tax audit report and certain other certificates (such as certification for Minimum Alternate Tax, claim for Special Economic Zone, etc.) is proposed to be preponed by a month from the due date for filing the return of income;
  • The due date for filing the income tax return has been extended from 30 September to 31 October (for company or person subjected to tax audit but not required to file Transfer Pricing Report). There has however been no change for filing the return for taxpayers who are required to file Transfer Pricing report which would remain to be 30 November;
  • The faceless scrutiny proposed to be extended to appeals before Commissioner of Income Tax (Appeals) and penalty proceedings;
  • Tribunal to consider the stay application only if 20% of the demand (including interest and penalty) has been deposited or a security is provided;
  • It is proposed that reference can also be made to Dispute Resolution Panel if there is a variance other than variance in income or loss;
  • A new detailed form proposed to be introduced replacing Form 26AS;
  • The return of income of a resident taxpayer can be verified by person other than Directors as may be prescribed by the tax authorities for this purpose.

Other Changes

  • The Central Board of Direct Taxes (CBDT) to notify ‘No Dispute but Trust Scheme’ (Vivad se Vishwas Scheme) for direct tax purposes. The Finance Minister announced that under the said scheme, the taxpayer would get complete waiver of interest and penalty provided the disputed taxes are paid by 31 March 2020. In cases where the scheme is availed after 31 March 2020, the taxpayers shall have to pay some additional amount. The said scheme would be open till 30 June 2020;
  •  It is proposed to empower the CBDT to:

− adopt and 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 the charter.

Conclusion

The Budget was a mixed bag of proposals for corporate taxpayers, wherein certain welcome moves such as abolition of DDT, rationalisation of tax holiday for startups, relaxation in return filing, announcement of new dispute resolution scheme to reduce litigation, etc. were announced. There was some disappointment on no extension of the SEZ sunset clause and expansion of the scope of business connection.

[1] Expected in December 2020

[2] under section 115A of the Act

[3] exceeding INR 50 Lacs (qua buyer) in a financial year

(Author Deepa Bakhru is Senior Manager with Deloitte Haskins and Sells LLP)

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