Amidst the lower gross domestic product, requirement of government expenditure and management of taxpayers’ expectations, Budget 2020 has proposed much-awaited and promising changes in terms of tax rate reductions, extension of exemptions for start-ups, etc., while also addressing some of the needs for reviving the economy.
1. Relief for start-ups and its employees:
Start-ups have been the focus both throughout the world and for the domestic Government. They face the challenges of absorbing the expenditure against income during their initial few years. Acknowledging this fact, and to bring more start-ups under the ambit of the eligibility of a tax holiday, it is proposed that the turnover criteria for eligible start-ups to qualify for a tax holiday be increased to INR 1bn (from the existing INR 250m). Further, flexibility has been provided to eligible start-ups to claim a tax holiday for three consecutive years out of ten years from incorporation (from the existing limit of seven years). Thus, eligible start-ups can now avail the benefit of a tax holiday for a period of three consecutive years out of ten years.
For the employees of eligible start-ups who tend to receive a significant component of their salary through employee stock option plans (ESOPs), such ESOPs are taxed as perquisite at the time of exercising such an option. To ease the burden of taxability of such ESOPs on employees, it has been proposed to defer the perquisite taxation on the exercise of such ESOPs to earlier than 48 months from the end of the relevant assessment year of the exercise of ESOPs or sale of such security or the date of cessation of the employment of the employee with the eligible start-up.
2. Abolition of dividend distribution tax (DDT) on dividends declared by Indian companies:
With the abolition of the DDT, the requirement of the industry after the reduction in corporate tax rate last year has been addressed, and we are back to the earlier tax regime wherein dividends were taxed in the hands of shareholders.
Said abolition of DDT and shift of incidence of dividend taxation from the payer company to shareholders will have varied impacts depending upon the tax status of the respective shareholders, applicable tax slabs of the respective shareholders, etc.
To illustrate, an Indian resident individual holds 100% equity in an Indian company. When the company declares dividends, it is liable to pay DDT @ 20.56%, and if such dividends received exceed INR 1m, they are taxable @ 10% (plus applicable surcharge and cess) in the hands of the shareholder. Pursuant to the proposed amendment in Budget 2020, while no DDT is payable, the company shall withhold tax @ 10% on such dividends, and the shareholder shall be liable to pay taxes at the applicable tax rate. The following table presents a comparison of tax costs wherein the individual shareholder receives a dividend of INR 1.5m and wherein the total taxable income of such individual exceeds INR 50m vis-à-vis where the total taxable income <= INR 1.5 m:
(Amount in INR ’000)
| Particulars | Reference | Existing | Proposed FY 2020–21 onwards | ||
| Where total income of individual > INR 50m | Where total income of individual <= INR 1.5m | Where total income of individual > INR 50m | Where total income of individual <= INR 1.5m | ||
| Dividend distributed by the company | A | 1,500.0 | 1,500.0 | 1,500.0 | 1,500.0 |
| Dividend received by the shareholder | B = A | 1,500.0 | 1,500.0 | 1,500.0 | 1,500.0 |
| DDT on dividend declared | C1 = B*20.56%/ 120.56% | 255.8 | 255.8 | NA | NA |
| Withholding tax on dividend declared | C2 = B*10% | NA | NA | 150.0 | 150.0 |
| Dividend received in the hands of the shareholder | D = B-C (1/ 2) | 1,244.2 | 1,244.2 | 1,350.0 | 1,350.0 |
| Additional tax levied in the hands of shareholder (super-rich levy) | E = (D – INR 1m)* (14.25%/ 10.40%)^ | 34.8 | 25.4 | NA | NA |
| Net dividend income in the hands of the shareholder | F = D – E | 1,209.4 | 1,218.8 | 1,350.0 | 1,350.0 |
| Dividend taxable in the hands of the shareholder | G = B * (42.74%/ #)^ | NA | NA | 641.1 | 273.0 |
| Credit of tax withheld | H = C2 | NA | NA | 150.0 | 150.0 |
| Total tax outflow | I = (C1+E)/ (G) | 290.6 | 281.2 | 641.1 | 273.0^^ |
| Effective tax rate (%) | J = I/ B*100 | 19.4% | 18.7% | 42.7% | 18.2% |
# Please note that income will be taxable as per the applicable slab rates.
^ Tax enhanced by a surcharge of 37% is applicable to taxable income above INR 50m. There is no surcharge on income below INR 5m/
^^It is assumed that the assessee is following the existing tax regime and not the lower tax rates proposed in the Budget 2020. In case the new tax regime is opted, the tax cost shall be INR 190,000, and the effective tax rate shall be 13% against the 18.2% above.
Further, the Finance Act proposes that no deduction of expenses incurred shall be allowed from such dividend income except interest expense, which shall be restricted to 20% of the dividend income.
While dividends shall be taxable in the hands of the shareholder, it is proposed to introduce a new section 80M under the Income-tax Act, 1961 to provide relief to domestic companies receiving dividends from other domestic companies to avoid a cascading effect. However, dividend received by a domestic company from foreign subsidiary shall still have a cascading effect.
3. Boost in investment in the real estate/ infrastructure sector
In the backdrop of a financial crisis for both state-owned and privately-owned enterprises, real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) have proven to be a new financing tool to aid ambitious plans to exploit opportunities in the infrastructure sector. There is a disparity in the taxation of REITs/ InvITs between listed and private unlisted InvITs. To address such disparity and align the taxation with the Securities and Exchange Board of India’s regulations, it is proposed to amend the definition of a business trust to include private unlisted InvITs.
With the changes in dividend taxation, it is proposed to make amendments in the taxability of dividends that REITs/ InvITs receive and then distribute to their unitholders. Budget 2020 has proposed that any dividend income directly received by REITs/ InvITs from a special purpose vehicle (whether or not a wholly owned subsidiary) in which the REIT/ InvIT has controlling interest shall be exempt in the hands of the REIT/ InvIT. However, if the dividend income is received directly from other investee companies that are not controlled by the REITs/ InvITs, it shall be taxable in the hands of the REITs/ InvITs at the maximum marginal rate.
Further, when the REITs/ InvITs distribute such dividends to their unitholders, they shall need to withhold tax at source @ 10%, and the dividend income received by unitholders from such REITs/ InvITs shall now be taxable in the hands of the unitholders at the tax rate applicable to the assessee vis-a-vis such dividends earlier being exempt for unit holders.
These amendments may act as a deterrent for the Government to achieve its aim to boost investment in these sectors through REITs/ InvITs.
4. Carry forward of business loss for the amalgamation of government banks:
It is proposed that the benefit of carry forward of losses and depreciation on amalgamation will be extended to public sector banks and general insurance companies.
5. Other key amendments:
- Concessional withholding tax rate of 5% on interest payments on the loans taken in foreign currencies under a loan agreement; issue of long-term bonds or rupee-denominated bonds has been extended for such borrowings until 30 June 2023 (earlier, 1 July 2020). Further, it is proposed to extend the concessional withholding tax rate of 5% on the interest payable to foreign portfolio investors under section 194LD of the Income-tax Act on government securities and rupee-denominated bonds for interest payments until 30 June 2023. This is a welcome move for attracting additional funding into India from external sources.
- For land or building or both acquired prior to 1 April 2001, it is proposed that the cost of acquisition for capital gains purposes shall be the actual cost or fair market value as on 1 April 2001 and shall not exceed the stamp value as on April 01, 2001. This may cause hardship in cases wherein the fair value of such land/ building exceeds the stamp duty value as on April 01, 2001.
- The proposal for an increase in safe harbour relating to deemed income provisions with respect to transfer/ receipt of immovable properties (being land or building or both) – i.e., no adjustments if the variation between stamp duty value and consideration is less than or equal to 10% of the consideration (as against currently 5%) – is an appreciated amendment.
With the backdrop of the fiscal deficit and need to bring growth impetus to the Indian economy, Budget 2020 has made significant promising amendments. These include abolishment of DDT, introduction of new personal tax regime, extension of concessional withholding tax rates under sections 194LC and 194LD, extension of tax holiday for eligible start-ups, introduction of the Direct Tax Amnesty Scheme (Vivad Se Vishwas Scheme), etc. Thus, this is a balanced budget paving the course for a vibrant India, riding high on inclusive growth and wealth creation, eliminating tax harassment and simplifying taxes. However, only time would tell whether it would provide the necessary impetus and optimism to the economy.
Author Details
(Contributed by Komal Jain, Manager, Deals, PwC India and Raghav Agarwal, Associate, Deals, PwC India)
