Key Direct Tax Amendments vide Finance Act, 2020

– The Finance Act, 2020 now includes the Director General and Principal Director General of Income-tax within the meaning of ‘Chief Commissioner’.

– The Principal Director General of Income-tax shall now be treated as an authority at par with Director General of Income-tax.

– Hence, for all such purposes under the Act, the Principal Director General of Income-tax shall have all the powers which have been conferred upon Director General of Income-tax.

– The exception provided in Explanation 1(b) to section 6(1), for individuals who are Indian citizens and persons of India origin visiting India in that year has been decreased to 120 days from existing 182 days.

Residential Status – Provision of ‘Deemed Resident’ applicable if total income exceeds INR 15 lakhs

– A new clause (1A) was inserted to section 6. It provides that an Indian citizen shall be deemed to be an Indian tax resident if he is not liable to tax in any other country by reason of residence or domicile or criteria of similar nature i.e. in case he is a ‘stateless person’, irrespective of the days spent in India

Deemed resident to be treated as ‘Not Ordinarily Resident’

– The existing conditions under section 6(6)(a) and (b) have been substituted, for treating an individual or an HUF to be ‘not ordinarily resident’ in India in a previous year. It is provided that if the individual or the manager of the HUF has been a non-resident in India in seven out of ten previous years preceding that year, then the individual or the HUF would be treated as ‘not ordinarily resident’.

– The exception provided in Explanation 1(b) to section 6(1), for Indian citizens and persons of India origin visiting India in that year has been decreased to 120 days, only in cases where the total income of such visiting individuals during the financial year from sources, other than foreign sources, exceeds INR 15 lakhs.

– The term ‘income from foreign sources’ has been defined to mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Residential Status – Provision of ‘Deemed Resident’ applicable if total income exceeds INR 15 lakhs

– The amendment to clause (1A), introduced by the Finance Bill, 2020 targeted individuals who do not spend considerable amount of time in any country so as to be treated as tax residents of such foreign countries.

– This created a lot of misapprehension in the non-resident Indian (NRI) community, especially for Indians who are bonafide employed in other countries or carry on business there, etc.; and who are not subject to tax in those countries as per the domestic tax law of those countries, will be taxed in India on the income that they have earned outside India.

– Hence, to avoid such misapprehension, the CBDT issued a Press Release dated 2 February 2020, clarifying that in case of an Indian citizen who becomes deemed resident of India, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.

– The scope of clause (1A) has been now limited through the Finance Act, 2020, and shall only be applicable to such Indian citizens who meet the threshold*. Accordingly, all Indian citizens who fail to meet the threshold, but are not subject to tax in any other jurisdiction, will not be considered as Indian tax resident

(*Threshold: an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year)

Deemed resident to be treated as ‘Not Ordinarily Resident’

– The proposed relaxation to the Resident but Not Ordinarily Resident (RNOR’) under the Finance Bill have been removed through the Finance Act, 2020, that is:

The Finance Bill proposed to streamline the test for RNORs by providing that an individual or an HUF shall qualify as an RNOR, if such individual or manager of the HUF has been a non-resident in India for seven out of the ten previous years preceding that year

– The Finance Act, 2020, now adds two categories to the test for RNOR in section 6(6).

– The below persons shall also be treated as RNOR:

• Indian citizens/ persons of Indian origin who meet the threshold and have been in India for a period of more than 120 days but less than 182 days i.e. those Indian citizens / persons of Indian origin who fulfil the conditions mentioned above in Explanation 1(b) to section 6(1) and

• Indian citizens who fulfil the conditions mentioned above in Explanation (1A) to section 6(1).

– The above amendments mean that even where an Indian citizen qualifies as a tax resident under section 6(1) of the Act but owing to the amendment as mentioned above to Explanation 1(b) and Explanation (1A) to section 6(1), he will still not be taxed on a worldwide basis (unless as per section 5 of the Act, such foreign income is derived from a business controlled in or a profession set up in India), even if he does exceed the threshold.

-The day count and total income criteria has to be examined every financial year

– The same shall be applicable from AY 2021-22

– Corpus donation not to be considered as an application of Income

[Amendment of Section 10(23C)]

No Deduction of Corpus Donations Made to Approved Institutions under Section 10(23C) [Amendment to Section 11]

– However, no such specific exemption was available to entities, funds, etc., registered under section 10(23C).

– An Explanation is hence inserted after the third proviso of section 10(23C): Corpus Donation received by institutions referred to in section 10(23C) shall be exempt from tax

– The explanation clarifies that the income of any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via) of the Act, shall not include income in the form of voluntary contributions made with a specific direction that

they shall form part of the corpus of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution

application of income for the donor. Currently, this restriction was only in respect of corpus donations made to entities registered under section 12AA.

– The amendment provides that the corpus donations shall not form part of the income of the funds or institutions availing the benefit of section 10(23C).

– Consequential amendment has also been made to 12^th proviso of section 10(23C): Corpus Donations made by institutions referred to in section 10(23C) of the Act not to be considered as application of income

– Any amount credited or paid out of income

– of any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via) of the Act,

– to any other fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in 10(23C)(iv), (v), (vi) or (via) of the Act or any trust or institution registered under section 12AA of the Act, being voluntary contribution made with a specific direction (Corpus donation) that they shall form part of the corpus of the trust or institution,

– shall not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or other medical institution, as the case may be, is established.

– Explanation 2 to section 11(1) of the Act: Corpus

Donations made by institutions referred to in section 12AA of the Act to institutions referred to in section 10(23C) of the Act not to be considered as application of income

– Similar amendments like amendments to the 12^thproviso of section 10(23C) are made in Explanation 2 to section 11(1).

– In view of this amendment, corpus donation given by a Section 12AA registered institution to section 10(23C) approved institution will not be treated as an application of income. This amendment has been introduced so that these institutions do not avail the dual benefit of exemption, as the corpus donations received by institutions approved under section 10(23C) shall not be treated as an income in their hands and also application of income.

– A business trust if it distributes the income (interest income and dividend income from SPV, rental income of REITs from real estate property) to its unit holders then such income shall be taxable in the hands of the unit holders under section 115UA as if they have earned such income by directly investing in SPV or real estate properties.

– All other incomes which a business trust distributes to its unit holders shall be exempt in the hands of the unit holders under section 10(23FD) of the Act.

– The Finance Act, 2020 now provides that no exemption shall available under section 10(23FD), to a unit holder of business trust in respect of a dividend received from SPV if such SPV has not exercised the option of section 115BAA of the Act. Consequential amendments have been made to section 194LBA.

Section 194LBA

– Section 194LBA (1) and (2) provide for deduction of tax at source by a business trust from income distributed to unit holders. Section 10(23FC)(b) provides for dividend received or receivable from SPV.

– Section 194LBA(2A) has been inserted vide Finance Act, 2020, to provide that no tax shall be deducted by a business trust from dividend distributed to the unit holders provided such dividend is distributed out of sum received as dividend from an SPV and the SPV has not exercised the option under section 115BAA.

– The dividend received by a unit holder from a business trust will be exempt from tax if an SPV opts for section 115BAA, hence, consequential amendment was required in section 194LBA to provide that no tax shall be deducted in such cases.

– The amendment as made by Finance Act, 2020 in section 194LBA(2A) creates conflict with the amendment to section 10(23FD), that is, In a case where SPV has opted for section 115BAA then section 194LBA requires business trust to deduct tax from dividend distributed to unit holders. Whereas, the amendment to section 10(23FD) provides an exemption in such a case. It appears that this is an unintentional mistake and the words ‘has not exercised’ in sub-section (2A) should be read as ‘has exercised’.

Section 115BAA

– Section 115BAA was introduced with effect from AY 2020-21 through the Taxation Laws (Amendment) Act, 2019 to provide for a concessional income tax rate of 22% in case of domestic companies which do not claim specific deductions, exemptions and allowances.

– Section 115BAA had been inserted to ostensibly simplify the tax structure and to reduce the litigation arising due to numerous tax exemptions and deductions claimed by the assessee. The new corporate tax regime reduces the tax rates to 22%, but in return, the companies have to forego certain exemptions and deductions.

– Where an SPV opts for new tax regime, no tax shall be levied at the time of distribution of dividend to business trust by an SPV or at the time of further distribution of such dividend by a business trust to the unit holder. Thus, dividend distributed by SPV which opts for section 115BAA shall be completely tax- free, as in the earlier regime. Whereas, if an SPV opts to pay tax as per normal provisions of the Act, the unit holders will eventually be liable to pay tax on dividend distributed by SPV.

– in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India,

– whether in the form of debt or equity,

– in a company or enterprise carrying on the business of developing, operating or maintaining any infrastructure facility as defined in Explanation to clause (i) of section 80-IA(4) of the Act or such other business as may be notified by the Central Government in this behalf.

– However, the investment is required to be made on or before 31 March 2024 and held for at least three years.

– The investment can be in the form of debt or equity, and is required to be made on or before 31 March 2024 and should be held for at least three years.

– It has been provided that specified persons shall be exempt from paying tax on any income arising from investment in Category-I / II AIFs, provided AIFs invest 100 per cent of the amount in one or more specified company or entity, i.e., company or enterprise carrying on the business of developing, operating or maintaining any infrastructure facility as defined in Explanation to clause (i) of section 80-IA(4) of the Act or such other business as may be notified by the Central Government in this behalf.

The exemption shall be available even if specified persons invest in preference share capital of the company, as now the Finance Act, 2020 covers investment in share capital or units and not equity share capital.

– Further, as section 10(23FE) is introduced for providing impetus for investment in infrastructure activities, the amendment states that exemption shall also be available even inrespect of income arising from investment in Infrastructure Investment Trusts (InVITs).

– A pension fund created or established under the law of a foreign country is also included in the list of specified persons and shall also be eligible for exemption under section 10(23FE) provided, it is not liable to tax in such foreign country and satisfy such other conditions as may be specified in this behalf.

– A proviso has been inserted to withdraw the exemption if specified person subsequently fails to satisfy the conditions on basis of which exemption was claimed in earlier years. It is provided that the amount of exemption claimed in earlier years shall be deemed to be the income of the assessee of the year in which it fails to comply with the conditions.

– The investment can be in the form of debt or share capital or unit, and is required to be made on or after 1 April 2020 but on or before 31 March 2024 and should be held for at least three years.

– Thus, exemption was not available in respect of dividend received on or after 1 April 2020 but declared on or before 31 March 2020.

However, dividend declared on or before 31 March 2020 is already subject to dividend distribution tax (DDT) under section 115-O of the Act, and if received in the current financial year would have resulted in such dividend being doubly taxed in the hands of the shareholder The shareholder may also be liable to pay tax under section 115BBDA for such dividend declared before 31 March 2020.

– The scope of Equalisation Levy has now been extended to also cover the consideration received or receivable for e-commerce supply or services made or provided or facilitated by an e-commerce operator. Thus, with effect from 1 April 2020, there will be two types of transactions in respect of which equalisation levy shall be charged, namely:

– Sum received or receivable by a non-resident for the online advertisement services rendered to specified persons;

– Sum received or receivable by an e- commerce operator from e-commerce supply of goods or services made or provided or facilitated to specified persons.

– Consequential amendments have been made to section 10(50) to give tax exemption for the income arising from any e-commerce supply or services made, or provided or facilitated on or after 1 April 2020, on which equalisation levy is chargeable.

– The same shall be applicable from AY 2021-22

– Section 80M provides for deduction in respect of the dividend income earned by the domestic company to the extent of the dividend further distributed by the same domestic company.

– The deduction was limited to a deduction equal to 100% of dividends received from another Indian company, subject to a maximum of the dividend distributed by the first mentioned Indian company, and so long as the distribution by the first mentioned Indian company was made on or before one month prior to the due date of filing of return of income.

– The Taxation Law (Amendment) Act, 2019 had inserted two new sections (section 115BAA and section 115BAB) to provide domestic companies with an option to be taxed at concessional tax rates with effect from 1 April 2020. Various conditions are provided in the new sections to opt for the new tax regimes including non-availability of deductions under Chapter-VIA except deductions under Section 80JJAA or Section 80LA.

– The Finance Bill, 2020 proposed to allow the deduction, to the domestic companies opting for the concessional rates, under section 80M as well. Section 80M is a newly proposed section which provides deduction in case of inter- corporate dividends with effect from 1 April 2021.

– The above amendments are due to the insertion of the new section 80M, consequent to the abolishment of dividend distribution tax under section 115-O. The benefit of the said deduction is extended to the sections 115BAA and 115BAB also.

– The Finance Bill had not proposed any similar deduction in respect of dividends received by an Indian company from any foreign company, including a specified foreign company, which is subject to a 15% tax under Section 115BBD of the Act.

– a foreign company and

– a business trust [defined under Section 2(13) of the Act as being a real estate investment trust (REIT) or an infrastructure investment trust (InvIT)].

– The deduction for the dividend received is still limited to the amount of dividend distributed by the Indian company on or before one month prior to the due date of filing of return of income.

– The Finance Act, 2020 has clarified that deduction under section 80M shall be available to the companies opting for new tax regime with effect from AY 2021-22.

– Explanation to section 92CB(2) provides the meaning of the term ‘safe harbour’ to mean circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee. The Explanation to Section 92CB defining safe harbour was not amended by the Finance Bill, 2020.

– The meaning of the term ‘safe harbour’ has now been amended as circumstances in which the income-tax authorities shall accept the transfer price or income, deemed to accrue or arise under section 9(1)(i), as the case may be, declared by the assessee.

– The same shall be applicable from AY 2020-21

– Section 115A(BA) provides that the following incomes received by a non-resident person shall be taxable at the rate of 5 per cent:

– Interest received from an infrastructure debt fund as referred to in section 10(47);

– Interest of the nature and extent as referred to in section 194LC or section 194LD;

– Interest paid by a business trust under section 194LBA(2).

– Section 115A of the Act specifies the tax rates for specified incomes in the hands of a non- resident assessee, inter-alia, dividend income, interest income, capital gains, royalty and fee for technical services.

– The Finance Act, 2020 now excludes the below mentioned income from the purview of five per cent taxation.

– Interest of the nature and extent as referred to in section 194LC or section 194LD

– Interest paid by a business trust under section 194LBA(2)

– Interest income as referred to in section 194LC,

Section 194LD and 194LBA(2) shall now be taxable at the rate provided in the respective sections.

– The same shall be applicable from AY 2020-21

– The new scheme is optional in nature and intends to provide comparatively lower rate of taxes vis-à-vis the existing rates of taxes for individuals and HUF.

– This regime of lower rate of tax is available on fulfillment of certain conditions. The primary condition in this regard is to not claim various exemptions and deductions.

– However, the taxpayer needs to exercise the option to be governed by this new scheme, under section 115BAC(5) as below:

i. having business income, on or before the due date specified under section 139(1) for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after the 1 April, 2021, and such option once exercised shall apply to subsequent assessment years

ii. having no business income, along with the return of income to be furnished under section 139(1) for a previous year relevant to the assessment year

– Under sub section (5) Nothing contained in this section shall apply unless option is exercised in the prescribed manner by the person

i. having income from business or profession, on or before the due date specified under sub-section (1) of section 139 for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after the 1 April, 2021, and such option once exercised shall apply to subsequent assessment years

ii. having income other than the income referred to in clause (i), along with the return of income to be furnished under section 139(1) for a previous year relevant to the assessment year

[Amendment to Section 206(1G) and Section 206(1H)]

– The scope of section 206C was widened to include TCS on foreign remittance through Liberalised Remittance Scheme (LRS) and on selling of overseas tour package, as well as TCS on sale of goods over a particular limit.

– An authorised dealer receiving an amount or an aggregate of amounts of INR seven lakh or more in a financial year for remittance out of India under the LRS of Reserve bank of India (RBI), shall be liable to collect TCS, at the rate of five per cent from the buyer. In case of no PAN/ Aadhaar is provided by the buyer, the rate of TCS shall be ten per cent.

– Similarly, a seller of an overseas tour program package who receives any amount from any buyer,being a person who purchases such package, shall be liable to collect TCS at the rate of five per cent.

In case of no PAN/ Aadhaar is provided by the buyer, the rate shall be ten per cent.

– Further, a seller of goods is liable to collect TCS at the rate of 0.1 per cent on consideration received from a buyer in a previous year in excess of INR fifty lakh. In case of no PAN/ Aadhaar is provided, the rate shall be one per cent.

– Only those sellers whose total sales, gross receipts or turnover from the business carried on by it exceed INR ten crore during the financial year immediately preceding the financial year, shall be liable to collect such TCS.

– Further, the provision of TCS on sale of goods would not be applicable if the buyer of goods is liable to deduct tax on such purchases, and he has deducted such taxes.

– Only those sellers whose total sales, gross receipts or turnover from the business carried on by it exceed INR ten crore during the financial year immediately preceding the financial year, shall be liable to collect such TCS.

– Further, the provision of TCS on sale of goods would not be applicable if the buyer of goods is liable to deduct tax on such purchases, and he has deducted such taxes.

– The Amendment to section 206(1G) now provides that:

– Tax shall be collected at source by the authorized dealer only on the remittance made under the LRS which is in excess of INR seven lakh.

– However, no such limit is applicable, where the remittance has been made through the authorized dealer for overseas tour program package.

– The authorized dealer shall not collect the tax on an amount in respect of which the tax has already been collected by the seller of such tour program package.

– In respect of any remittance made by the authorized dealer under the LRIS scheme, for a loan obtained for pursuing education, from any financial institution referred to in section 80E, then the rate of TCS is 0.5% in excess of INR seven lakh.

– The Amendment to section 206(1H) now provides that:

– No tax shall be collected at source in respect of goods exported out of India, or in respect of goods imported into India.

– The Amendment provides that the CBDT with the approval of the Central Government can issue guidelines to remove difficulty in implementation of section 206(IG) and (IH), and that such guidelines need to be laid before each House of the Parliament.