Direct Tax Highlights of Budget presented on 1st February 2020

♦ New Taxation Scheme for Individuals & HUF:

Alternate/Optional tax regime provided to individuals and HUF by insertion of Section 115BAC. A summary on the rates of tax is provided below:

* Individuals and HUF’s not having business income can each year decide on which option to choose. For those having business income, if the optional mechanism is adopted, then the same will have to be followed for all subsequent previous years.

If the optional tax rates are to be adopted, then the deductions under Chapter VIA or Interest u/s 24 (House property interest) or sett off of losses under any head or LTA (Section 10(5)) or HRA (Section 10(13A)) will not be available.

♦ Changes in Residency provisions:

• INDIAN CITIZEN OR PERSON OF INDIAN ORIGIN – Section 6(1):

Presently, an assessee is considered as resident in India if:

1. his period of stay in India during the year is 182 days or more

2. Having been in India in preceding 4 years for 365 days is in India for a period of 60 days. In respect of Indian citizen or Person of Indian Origin (POI) who has come to India on visit, the period of 60 days is replaced by 182 days.

It is now proposed that such Indian citizen or POI, who come on visit to India, period of 182 days shall be replaced by 120 days

• RESIDENT BUT NOT ORDINARILY RESIDENT – Section 6(6)

Presently, an individual or HUF is considered as “not ordinarily resident” if such individual or manager of the HUF:

1. is a non-resident in India in 9 out of the 10 preceding years; or

2. Period of stay in India during the 7 preceeding years is 729 days or less.

It is proposed to substitute the above conditions with the sole criteria of being a non-resident in 7 out of 10 preceding years, to be considered as “not ordinarily resident”

♦ Deemed Resident in India:

It is now proposed that an individual, being a citizen of India, who is not liable to tax in any country shall be deemed to be resident of India in such previous year, irrespective of his period of stay in India.

The effect of the amendment in definition of resident but not ordinarily resident may result in relief for few years to a person who otherwise becomes resident by virtue of deeming provision.

A clarification was issued by CBDT on 2^nd February,2020, stating that in case of an Indian Citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession

♦ Perquisites:

• Section 17(2)(vii) is proposed to be substituted to give a combined upper limit of Rs. 7,50,000/- in respect of employer’s contribution to NPS, superannuation fund and recognized provident fund.

• Hence, in addition to the respective limits for each of these funds, any amount contributed in excess of the above limit will be taxable in the hands of the employee as perquisite.

• As of now, any amount contributed by the employer in excess of Rs. 1,50,000 to superannuation fund or in excess of 10% of salary in NPS or in excess of 12% of salary to recognized provident fund is treated as a perquisite. With this amendment, even if individually the amounts are below the threshold limits, if the total investment is more than Rs. 7,50,000/-, the said amount will be considered as a perquisite. The below example will give a better picture:

Employer’s share to PF: Rs. 3,60,000/- (12% of salary)

Employer’s share to NPS: Rs. 3,00,000/- (10% of salary)

Employer’s share to Superannuation fund: Rs. 1,50,000

In the above case, the total employer’s share is Rs. 8,10,000/- Hence Rs. 60,000 (Rs. 8,10,000 – Rs. 7,50,000) will be considered as a perquisite in the hands of the employee.

• In addition to the above, if any interest, dividend or any amount of similar nature earned on such perquisite is and is credited to the balance of the fund or scheme, the said interest, dividend or sum will have to be included in total income under the same clause.

Hence, continuing the above example, if Rs. 5,000 is earned as interest/dividend on the above excess of Rs. 60,000, then the said Rs. 5,000 will also be taxable under the same clause.

♦ Deemed Consideration in cases of sale of land & building:

• Amendments are proposed in Section 43CA, 50C and 56, whereby the existing deviation accepted of 5% is proposed to be increased to 10%.

• The below example will give a better understanding:

♦ Tax Audit for person carrying business:

• In the following circumstances, tax audit will be applicable for businesses only if their turnover exceeds Rs. 5 crore:

• Aggregate of all receipts in cash does not exceed 5% of the total turnover, sales or gross receipts during the previous year and

• Aggregate of all payments in cash does not exceed 5% of the total payments including for expenditure.

• Due Dates for Tax Audits and Income Tax Returns:

• The due dates for filing the tax audit report will be the date one month prior to the due date specified in Section 139.

• For Companies and persons liable for tax audit, the due date to file the return of income will now be 31^st day of October of the said assessment year.

♦ Dividend:

• Dividend distribution tax as levied under Section 115-O is proposed to be deleted.

• Dividend will now be taxable as per the earlier classical method i.e. in the hands of the shareholders at their normal tax slabs.
• Onus has been put on the Companies to deduct TDS on dividends paid to residents @ 10% where the dividend amount is more than Rs. 5,000/-

♦ Changes proposed in TDS provisions:

• Section 192 – Salaries:

• In cases where income is taxable, for a person of an eligible start-up referred to in Section 80-IAC, under Section 17(2)(vi) [ESOP or sweat equity shares], the said start-up will have to deposit the tax on such income within 14 days of:
  • Expiry of 48 months from the end of relevant Assessment Year or
  • From the date of sale of such specified security or specified asset or
  • From the date the assessee ceases to be the employee of such person

Whichever is the earliest

• Tax will be deducted at the rates in force for the Financial Year in which the said specified security or sweat equity share is allotted or transferred.

• Section 194 – Dividend:

• TDS will have to be deducted on dividend payments to residents above Rs. 5,000/-.

• Section 194C – Contracts

• Definition of ‘works’ is amended to also include in its scope cases of works contract where materials are provided to the work contractor by a related party of the customer.

• Section 194K

• Section 194K is introduced instructing for withholding 10% tax in cases where income from units of mutual funds are paid to a resident.

• Section 194J – Professional or Technical Fees:

• TDS rate is case of payment to residents for Technical services is proposed to be reduced to 2%.

• Section 194-O

• E-Commerce Operators now need to deduct TDS @ 1% at the time of crediting the account of e-commerce participant of sale of good or service or payment to its account whichever is earlier.

• The amount will be deemed to credited to the e-commerce participants account even if it is directly paid to them by the purchaser of good or service purchased through the facility provided by e-commerce operator.

• In case the E-commerce participant is an individual or a HUF, no TDS will be deducted if the amount of such sale is below Rs. 5,00,000/-.

• In absence of PAN, TDS will be deducted @ 5%.

• General Understanding

• Earlier, it was a general understanding that every person who deducts TDS also has to get its books of accounts audited under Section 44AB of the Act.

• But due to various amendments, this understanding will now not hold good.

• For eg, in cases where a business earns Rs. 4 crores of turnover and satisfies the conditions as laid under Section 44AB, it will not be liable for tax audit but will still have to deduct TDS on payments made.

♦ Changes proposed in TCS provisions:

• Every authorised dealer while remitting a sum outside India of Rs. 7,00,000 or more from a person during a year will be responsible for collecting TCS @ 5%. In cases where there is no PAN, TCS will be collected @ 10%.

• A vendor selling overseas tours will also have to collect 5% TCS from the buyers of such tours.

• In cases where purchases of goods are made for an amount exceeding Rs. 50,00,000 in any previous year has to collect TCS @ 0.1% on such amount exceeding Rs. 50,00,000. In absence of PAN, TCS will be collected @ 1%.

♦ Relief to Non-Residents from filing of Income Tax Returns in certain conditions:

♦ Additional Amendments:

• Form 26AS now to have details about sale/purchase of shares/properties etc.

E-Appeal proceedings to be initiated in line with the current e-assessment proceedings