Direct Tax

I. Changes in Income Tax Rate Slab for Individual

Finance Minister Nirmala Sitharaman introduced new slabs and reduced the tax rate for different slabs for an individual income up to Rs 15 lakh per annum, if a taxpayer opts for foregoing exemptions and deductions.

The new tax regime will be optional and the taxpayers will be given the choice to either remain in the old regime with exemptions and deductions or opt for the new reduced tax rate without those exemptions.

Under the proposal, people with an annual income of Rs 5 lakh to Rs 7.5 lakh will have to pay a reduced tax rate of 10 percent; between Rs 7.5 lakh and Rs 10 lakh: 15 percent; between Rs 10 lakh and 12.5 lakh: 20 percent; between Rs 12.5 lakh and 15 lakh: 25 percent; and above Rs 15 lakh: 30 percent.

Taxable Income Slab Tax under Old Regime Tax under New Regime
Upto 2.5 lacs  Nil tax Nil Tax
2.5 lacs to 5 lacs  Tax @ 5% Tax @ 5%
5 lacs to 7.5 lacs  Tax @ 20% Tax @ 10%
7.5 lacs to 10 lacs  Tax @ 20% Tax @ 15%
10 lacs to 12.5 lacs  Tax @ 30% Tax @20%
12.5 lacs to 15 lacs  Tax @ 30% Tax @25%
Above 15 lacs  Tax @ 30% Tax @ 30%

The taxability of income upto 5 lacs is not clear right now. However as per PIB (Press Information Bureau), income tax rate for taxable income between 2.5 lacs and 5 lacs will be 5%. The new regime will be optional and the people can continue with old regime if they desire so. There are about 100 tax exemptions and deductions under income tax act and 70 of them are being removed in the new simplified tax regime, while the remaining will be reviewed and examined in due course.

II. Rate of Income tax for other than Individuals

Tax on cooperative societies is proposed to be reduced from present rate of 30% to 22% plus surcharge and cess with no exemption/deduction.

It is also proposed to exempt these co-operative societies from Alternative Minimum Tax (AMT) just like companies under the new tax regime are exempted from the Minimum Alternate Tax (MAT).

In order to give boost to the manufacturing sector, new provisions were introduced  in September 2019 offering a concessional corporate tax rate of 15% to the newly incorporated domestic companies in the manufacturing sector which start manufacturing by 31st March, 2023.

To boost power generation capacity, government has extended the new corporate tax regime for new domestic companies engaged in the generation of electricity. New power generation companies will have to pay just 15 per cent tax under the new corporate tax regime. This will help is setting up of new power generation companies to meet the growing energy needs of India.

III. Shift of DDT Burden from companies to Individuals 

Budget 2020 proposes to make dividend income from shares taxable in the hands of the recipient at the applicable slab rates and abolish the Dividend Distribution Tax (DDT) hitherto levied on dividend income before distribution.

All kinds of dividend income i.e. dividend income received from mutual funds and equity shares will now be taxable in the hands of taxpayers. The dividend income which was hitherto tax-exempt in the hands of taxpayers will now become fully taxable. This would mean that the taxable income of the individuals will go up.

Currently, DDT is paid by the companies before paying dividend to their shareholders. Therefore, Dividend paid to the shareholders of the company becomes tax-free in their hands.

Moreover, dividend received by holding company from its subsidiary is to be allowed to the holding company.

Logic behind the amendment given by Finance Minister in her Budget :-

It has been argued that the system of levying DDT results in  increase in  tax burden for  investors  and especially those who are liable to pay tax less than the rate of DDT if the dividend income is included in their income.

Further, non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return on equity capital for  them. In order to increase the attractiveness of the Indian Equity Market and to  provide relief to  a large class of investors, It is proposed to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate.

IV. Deferment of tax payment on ESOP to employees of start-ups

It has been proposed in Budget 2020 to defer tax deducted at source (TDS) or tax payment on income earned from Employee Stock Option Plans (ESOPs) given to employees of start-ups. This means that employees of start-ups who are exercising their ESOPs may have to pay tax at a later date.

ESOP is a significant component of compensation for these 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. In order to give a boost to the start-up ecosystem, it is proposed to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest.

Currently, ESOPs are taxed as perquisites under section 17(2) of the income-tax Act read with Rule 3(8)(iii) of the Rules. The taxation of ESOPs is split into two components:

i. Tax on perquisite as income from salary at the time of exercise.

ii. Tax on income from capital gain at the time of sale.

The change has been proposed when tax is levied at the time of exercise of ESOPs. This is currently treated as perquisite under the head income from salary at the time of exercise. This is done to ease the cash flow problem of the employees as no cash benefit arises by buying shares and leads to additional tax payout over and above the exercise price.

According to the proposal, the tax in such a scenario will now be required to be paid as follows:

(i) after the expiry of 5 years from the end of the relevant financial year in which ESOPs are bought; or

(ii) from the date of the sale of such specified security or sweat equity share by the employee); or

(iii) from the date of which the employee ceases to be the employee of the person;

Such tax has to be deposited within 14 days after any of the above-mentioned event takes place. Once this proposal is passed from the Parliament will become applicable from April 1, 2020.

V. Extension of Tax holiday for Start-ups

An eligible start-up having turnover up to Rs 25 crore is allowed deduction of 100 per cent of its the profits for three consecutive assessment years out of seven years if the total turnover does not exceed Rs 25 crore rupees. In order to extend this benefit to larger start-ups, it is proposed to increase the turnover limit from existing Rs 25 crore to Rs 100 crore.

Moreover, considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, it is proposed to extend the period of eligibility for claim of deduction from the existing seven years to 10 years.

VI. Tax Amendment for MSME’s

An unveiled measures is aimed by government at facilitating growth of the country’s micro, small and medium enterprises including raising the turnover threshold for audit of their accounts to Rs 5 crore and a scheme to provide subordinate debt to MSME entrepreneurs.

“Currently, only businesses having a turnover of more than Rs 1 crore are required to get their books of accounts audited by an accountant. In order to reduce compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, I propose to raise by five times the turnover threshold for audit from the existing rupees one crore to five crore,” Finance Minister Nirmala Sitharaman said while presenting the Budget 2020-21. Further, in order to boost less cash economy, I propose that the increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash.

A scheme will be introduced to provide subordinate debt to MSME entrepreneurs. Besides, the government has also asked the Reserve Bank to extend the debt restructuring window for micro, small and medium enterprises by a year to March 31, 2021.

An app-based invoice financing loans product is proposed to be launched to obviate the problem of delayed payments and consequential cash flow mismatches for the MSMEs.

Necessary amendments is proposed be made to the Factor Regulation Act 2011 to enable non banking financial companies (NBFCs) to extend invoice financing to the MSMEs through TReDS, thereby enhancing the economic and financial sustainability.

Working capital credit remains a major issue for MSMEs. It is proposed to introduce a scheme to provide subordinate debt for entrepreneurs of MSMEs. This subordinate debt to be provided by banks would count as quasi equity and would be fully guaranteed through the Credit Guarantee Trust for the Medium and Small Entrepreneurs.

TReDS is an institutional mechanism to facilitate the trade receivable financing of micro, small and medium enterprises (MSMEs) from corporate buyers through multiple financiers.

It is announced today that more than five lakh MSMEs have permitted from restructuring of debt permitted by RBI in the last year under the restructuring window which was to end on March 31, 2020, but the government has asked RBI to consider extending this window till March 31, 2021.

VII. 100% tax exemption to Sovereign Wealth Fund of foreign governments

In order to provide incentive to the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, 100% tax exemption is proposed to be granted to their interest, dividend and capital gains income in respect of investment made in infrastructure and other notified sectors before 31st March, 2024 and with a minimum lock-in period of 3 years.

NIIF is India’s first sovereign wealth fund that was set up by the Government of India in February 2015. It manages over $4 billion of capital commitments across three funds. Apart from The National Investment and Infrastructure Fund (NIIF) – the country’s only sovereign wealth fund, India has already seen a large pool of infrastructure investments by global sovereign wealth funds such as Singapore based GIC, Temasek Holdings and Middle East based Abu Dhabi Investment Authority. The government will provide tax exemptions for a sovereign wealth fund which is wholly owned and controlled, directly or indirectly, by the Government of a foreign country and it is set up and regulated under the law of such foreign country.

VIII. Widening and Deepening Of Tax Base

a) TDS on E-commerce transactions: In order to widen and deepen the tax net, it is proposed to provide that e-commerce operator shall deduct TDS on all payments or credits to e-commerce participants at the rate of 1% in PAN/Aadhaar cases and 5% in non-PAN/Aadhaar cases. In order to provide relief to small businessman, it is proposed to provide exemption to an individual and HUF who receives less than Rs. 5 lakh and furnishes PAN/Aadhaar.

b) Enlarging the scope of TDS on interest: It is proposed to extend the TDS on interest paid by certain large co-operative societies whose gross receipts exceeds fifty crore rupees during the last financial year.

c) Widening the scope of TCS:  It is proposed to provide for tax collection at source (TCS) on remittance under Liberalised Remittance Scheme of Reserve Bank of India exceeding seven lakh rupees in a year and on sale of overseas tour package. Further, TCS is also proposed on sale of goods in excess of fifty lakh rupee in a year by a seller whose turnover is more than 10 crore rupees.

d) Limit on exemption of Employer’s contribution to certain funds:It is proposed to put an upper cap of seven lakh and fifty thousand rupees in a year on tax exempt employer’s contribution in recognized provident fund, superannuation fund and NPS in the accounts of an employee.

IX. Tax Amendment for Non-Residents

i. The period of concessional withholding rate of 5% under section 194 LC is extended for interest payment to non-residents in respect of moneys borrowed and bonds issued upto 30thJune, 2023.

ii. The period upto 30thJune, 2023 for lower rate of withholding of 5% under section 194 LD is extended for interest payment to Foreign Portfolio Investors (FPI) and Qualified Foreign Investors (QFI) in respect of bonds issued by Indian companies and government securities.

iii. The concessional rate of withholding of 5% under section 194 LD is extended to the interest payment made on the municipal bonds.

iv. Withholding tax rate on the interest payment on the bonds listed on IFSC exchange is reduced from 5% to 4%.

X. Other Tax Amendment

a) A new taxpayer charter is to be instituted to end tax harassment. The Income Tax Act will be amended to allow faceless appeals against tax orders on lines of faceless assessment.

b) A new direct tax dispute settlement scheme — Vivaad se Vishwaas scheme is launched to bring down litigation in direct taxation scheme saying 4.83 lakh direct cases are pending in various appellate forums. Interest and penalty will be waived under this scheme for those who wish to pay the disputed tax amount till March 31.

c) In order to ease allotment of PAN, new process of instantly allotting the same through Aadhaar will be brought as announced under budget, 2020.

d) It is also announced under budget,2020 for extending by one year the date of approval of affordable housing projects for availing tax holiday on profit earned by developers. Extension of additional Rs 1.5 lakh tax benefit is also announced on interest paid on affordable housing loans to March 2021.

e) New National Policy on Official Statistics is proposed to improve data collection and dissemination with the help of technology.

f) Registration of charity institutions to be made completely electronic and donations is made to be pre-filled in IT return form to claim exemptions for donation.

g) 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.   In order to minimize hardship in real estate transaction and provide relief to the sector, it is proposed to increase the limit of 5% to 10%.

h) It is proposed to provide that the amalgamated public sector banks and insurance companies shall be eligible to take the benefit of unabsorbed losses and depreciation of the amalgamating entities.

i) It is proposed to provide that the amalgamated public sector banks and insurance companies shall be eligible to take the benefit of unabsorbed losses and depreciation of the amalgamating entities. In order to encourage unlisted Infrastructure Investment Trust (InvIT) or a Real Estate Investment Trust (REIT), it is proposed to extend the same taxation regime as available to listed InvITs and listed REIT to unlisted REIT and InvIT.

j)  It is proposed to provide exemption to Indian Strategic Petroleum Reserves Limited (ISPRL) in respect of income accruing or arising as a result of an arrangement for replenishment of crude oil stored in its storage facility in pursuance to directions of the Central Government in this behalf subject to the condition of replenishment of crude oil within three years.

k) In order to reduce litigation, it is proposed to reduce rate for TDS in case of fees for technical services (other than professional services) to two per cent from existing ten per cent in order to align the same with the rate of TDS on works contract.

l) In order to provide tax certainty to taxpayers in the matter of attribution of profit to permanent establishment (PE), it is proposed to widen the scope of Advanced Pricing Agreement (APA) and Safe Harbour Regime (SHR), by providing that determination of attribution of profit to PE shall also be in the scope of SHR and APA.

m)  It is proposed to provide that expenses disallowed in the hands of insurance companies for late payment of statutory dues shall be allowed in the year of payment.

Indirect Tax

I. The government increased customs duty on several products, including toys, footwear and furniture items, with a view to promote ‘Make in India’ and boost domestic manufacturing. Customs or import duty on footwear has been increased from 25 per cent to 35 per cent and on parts of footwear to 20 per cent from 15 per cent. Similarly, on toys like tricycles, dolls, and puzzles of all kinds, the duty has been hiked to 60 per cent from 20 per cent at present. On furniture goods such as seats, mattress support, articles of bedding, and lamps and lighting fittings, the import duty has been increased to 25 per cent from the current 20 per cent.

II. Finance Minister Nirmala Sitharaman said in her Budget speech that Labour intensive sectors in MSME are critical for employment generation. Cheap and low-quality imports are an impediment to their growth. She said that special attention has been taken to put measured restraint on import of those items which are being produced by our MSMEs with better quality. Customs duty is being raised on items like footwear and furniture keeping in view the need of this sector.

III. A simplified return format for GST is being introduced from April 2020, Finance Minister Nirmala Sitharaman said on Saturday. In her second Budget presentation, the finance minister said GST has resulted in gains of Rs 1 lakh crore to consumers and removed inspector raj and also helped the transport sector. “Average household now saves 4 per cent in monthly expense after the rollout of GST,” Sitharaman said, and added that the Budget for 2020-21 aims to fulfil aspirations of people.

IV. Refund process has been simplified and has been made fully automated with no human interface.

V. Electronic invoice is another innovation wherein critical information shall be captured electronically in a centralized system. It will be implemented in a phased manner starting from this month itself on optional basis. It will facilitate compliance and return filing.

VI. Several measures have been taken for improving compliance.  Aadhaar based verification of taxpayers is being introduced. This will help in weeding out dummy or non-existent units. Dynamic QR-code is proposed for consumer invoices. GST parameters will be captured when payment for purchases is made through the QR-code. A system of cash reward is envisaged to incentivise customers to seek invoice.  Deep data analytics and AI tools are being used for crackdown on GST input tax credit, refund, and other frauds and to identify all those who are trying to game the system. Invoice  and input tax credit matching is  being done wherein returns having mismatch more than 10 percent  or above a threshold are identified and pursued. Significant policy level changes have also been made. GST rate structure is also being deliberated so as to address issues like inverted duty structure.

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October 2021