Snapshots of Union Budget 2020 – Direct Tax Amendments

Budget 2020- Article explains New Tax Regime (Optional Scheme) Vs Earlier Regime (Existing Scheme) – For Individual and HUF, Exemptions and Deductions Foregone to opt for optional Scheme, Insertion of Section 194O : TDS on Sale of Goods and Services through E-Commerce, Amendment in Section 206C (TCS Provisions), Modification of Residency Provisions (Sec – 6 of the Act), Amendment in Sec 44AB(a) – Revised limits of Tax Audit for Certain Categories, Insertion of Section 80M: Deduction from Dividend Income, Clarity on Stay of Demand by ITAT, Penalty for Fake Invoices, About DDT Abolished, Proposed Amendment in Tax Provisions related to Trusts and Charitable Entities, Amendment in Definition of Work under section 194C of the Act and Other Miscellaneous Amendments proposed vide Finance bill 2020 in Income Tax Act, 1961.

1. New Tax Regime (Optional Scheme) Vs Earlier Regime (Existing Scheme) – For Individual and HUF

5% for income between Rs. 2.5 Lakh to 5 Lakhs against 10%

10% for income between more than Rs 5 lakh-7.5 lakh against 20%

15% for income between more than Rs 7.5 lakh-10 lakh against 20%

20% for income between more than Rs 10-12.5 lakh against 30%

25% for income between more than Rs 12.5 -15 lakh against 30%

30% for income above Rs 15 lakh

* This option shall be exercised for every previous year where the individual and HUF has no business income and in other cases option once exercised cannot be withdrawn. This option can be withdrawn only once when it was withdrawn by the individual or HUF having business income and thereafter, the person shall never be eligible to exercise the option under this section, except where such person ceases to carry on any business.

*Provision of Sec 115JC (AMT) – Not Applicable to person having business income – No carry forward and set off of AMT allowed.

2. Exemptions and Deductions Foregone to opt for optional Scheme

LTC, HRA, allowances as per Sec 10(14), Allowance to MP/MLA Sec – 10(17), Allowance for income of minor, Sec – 10AA (SEZ) Exemption, Standard Deduction (u/s 16), Interest on house property for self occupied or vacant property/Loss under the head HP, Additional Depreciation, Deductions u/s 35, 35AD, 35CCC, Deduction from family pension u/s 57, Deductions under Chapter VIA (except Sec – 80CCD and 80JJAA)

Removal of exemption in respect of free food and beverage through vouchers provided to the employee, being the person exercising option under the proposed section, by the employer. (Rule -3)

However following allowances notified u/s 10(14) of the Act to the Individual or HUF exercising option are allowed:

(a) Transport Allowance granted to a divyang employee to meet expenditure for commuting between place of residence and place of duty

(b) Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office;

(c) Any Allowance granted to meet the cost of travel on tour or on transfer;

(d) Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

3. Insertion of Sec – 194-O : TDS on Sale of Goods and Services through E-Commerce

• This section is inserted to tax the sale of goods or services or both through e-commerce facility, the E-commerce operator is required to deduct tax at the rate of 1 percent at the time of payment or credit to the account of E-commerce participant.
• If sum paid to the E-commerce participant being individual or HUF, then TDS will not be deducted if gross amount of sale or services or both during the year does not exceed Rs. 5 Lacs and the participant provided its PAN or Aadhar to the operator.
• E-commerce participant means a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce.
• Services defined to include fees for technical services and fees for professional services, as defined in section 194J.
• Sec 206AA is also amended to provide for TDS at 5 percent in case of No aadhar or PAN provided by the participant.

4. Amendment in Section 206C (TCS Provisions):

Widening of scope to include TCS on Foreign remittance trough LRS of RBI and on selling overseas tour package as well as on sale of goods over limit

• Authorized dealer, receiving an amount or aggregate of amount of Rs. 7 Lacs or More in a FY for remittance out of India under LRS of RBI, shall be liable to collect TCS from remitter at 5 percent ( 10 percent in No PAN/Aadhar Cases).
• Seller of overseas tour package – TCS Provisions will apply (similar rates as above)
• TCS provisions not apply if buyer required to deduct TDS and he deduct the same. TCS provisions also not applicable for buyers of certain categories.
• A seller of goods is required to collect TCS from buyer at the rate of 0.1 percent , if he sold goods to any person of an amount exceeding 50 Lacs during a FY (rate will be 1 percent for NO PAN/Aadhar cases).
• These TCS provisions will be applicable if seller has gross turnover of more than 10 crores in preceding FY.
• No TCS from certain category of buyers.
• No TCS if seller liable to deduct TCS under any other provision of Sec – 206C or buyer is liable to deduct TDS and he deducted TDS appropriately.

5. Modification of Residency Provisions (Sec – 6 of the Act)

It order to follow the idea of BEPS measures and remove double non taxation of income, it is proposed that:

• the exception provided in clause (b) of Explanation 1 of sub-section (1) to section 6 for visiting India in that year be decreased to 120 days from existing 182 days.
• an individual or an HUF shall be said to be “not ordinarily resident” in India in a previous year, 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. This new condition to replace the existing conditions in clauses (a) and (b) of sub-section (6) of section 6 (which is 9 years out of 10 years or total no of 729 or less days in preceding 7 PY).
• an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.*

* This provision need to be rechecked by the Government as this will create unnecessary litigation amongst Indian Citizens outside India and it might override DTAA and Chargeability Sections of Income Tax Act.

6. Amendment in Sec 44AB(a) – Revised limits of Tax Audit for Certain Categories

In order to reduce compliance burden on small and medium enterprises, it is proposed to increase the threshold limit for a person carrying on business from one crore rupees to five crore rupees in cases where:

• aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipt; and
• aggregate of all payments in cash during the previous year does not exceed five per cent of such payment
• Note: The provisions of Sec 44AB(d) will still apply in consonance with Sec 44AD(4).
• *For enabling TDS/TCS provisions old limit of Rs. 1 Crore will still apply.

7. Insertion of Sec – 80 M: Deduction from Dividend Income

(1) Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date.

Eg. Suppose Co. A get dividend from Co. B Rs. 100 and gross total income of Co. A is Rs. 500 (including dividend income), then Co A get deduction from Gross total income of Rs. 500 of Rs. 100 or upto the amount of income distributed as dividend by Co A on or before the due date, whichever is lowest.

(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

Explanation: For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.

*This section is inserted to support the amendment of removal of DDT on Companies.

8. Clarity on Stay of Demand by ITAT

• First proviso to Sub-Section 254(2A) provide that ITAT may provide the stay of demand depending on the merits of the case for a maximum period of 180 days. As per second proviso ITAT may extend stay on being satisfied that the delay is not on account of assessee subject to maximum 365 days and ITAT will dispose of the stay within extended time.
• It is proposed to provide that ITAT may grant stay under the first proviso subject to the condition that the assessee deposits not less than twenty per cent of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act or furnish security of equal amount in respect thereof.
• It is also proposed to substitute second proviso to provide that no extension of stay shall be granted by ITAT, where such appeal is not so disposed of which the said period of stay as specified in the order of stay. However, on an application made by the assessee, a further stay can be granted, if the delay in not disposing of the appeal is not attributable to the assessee and the assessee has deposited not less than twenty per cent of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act or furnish security of equal amount in respect thereof. The total stay granted by ITAT cannot exceed 365 days.

9. Penalty for Fake Invoices

• This penalty will be initiated with the help of GST department.
• This penalty will be levied on a person, if it is found during proceeding under the Act that there is either false entry or any entry relevant to the computation of total income not recorded in books of accounts maintained by the assessee.
• Penalty equivalent to the aggregate amount of fake invoices will be levied.
• It is also proposed to provide that any other person, who causes in any manner a person to make or cause to make a false entry or omits or causes to omit any entry, shall also pay by way of penalty a sum which is equal to the aggregate amounts of such false entries or omitted entry.

10. DDT Abolished

• Dividend income will be taxed in the hands of shareholders only. It is also proposed to limit the deduction of expense (i.e only interest expense) from dividend to maximum 20 percent of the income.
• Sec 194 amended to provide for deduction of tax on payment of dividend by payer at the rate of 10 percent with a threshold limit of Rs. 5000.
• Amendment in Sec 194LBA to provide tax deduction on dividend income by business trust at 10 percent and for NR at the rate of 5 percent.
• Insertion of new sec 194K for tax deduction by income distributed by Mutual Funds Companies at the rate of 10 percent with threshold limit of Rs. 5000.
• Sec 195 also amended to delete exemption provided to dividend.

11. Trusts and Charitable Entities

• The registration of all trusts and entities u/s 12AA will be examined in every 5 years to check the genuiness and check the conditions of approval are adhered or not.
• The entities receiving donation/ sum may be made to furnish a statement in respect thereof, and to issue a certificate to the donor/ payer and the claim for deduction to the donor/ payer may be allowed on that basis only. In order to ensure proper filing of the statement, levy of a fee and penalty may also be provided in cases where there is failure to furnish the statement.
• An entity already approved under section 80G shall also be required to apply for approval and on doing so, the approval, registration or notification in respect of the entity shall be valid for a period not exceeding five years at one time. application for approval under section 80G shall be made to Principal Commissioner or Commissioner.
• An entity making fresh application for approval under clause (23C) of section 10, for registration under section 12AA, for approval under section 80G shall be provisionally approved or registered for three years on the basis of application without detailed enquiry even in the cases where activities of the entity are yet to begin and then it has to apply again for approval or registration which, if granted, shall be valid from the date of such provisional registration. The application of registration subsequent to provisional registration should be at least six months prior to expiry of provisional registration or within six months of start of activities, whichever is earlier.
• Similar to section 80G of the Act, deduction of cash donation under section 80GGA shall be restricted to Rs 2,000/- only.
• These amendments are effective from 01.06.2020.

12. Amendment in Definition of Work under section 194C of the Act

• Definition includes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer within the definition. However, it excludes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.
• it is proposed to amend the definition of “work” under section 194C to provide that in a contract manufacturing, the raw material provided by the assessee or its associate shall fall within the purview of the ‘work’ under section 194C. Associate is proposed to be defined to mean a person who is placed similarly in relation to the customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A of the Act.

13. Other Miscellaneous Amendments

• Amendment in Sec – 94B to provide that provisions of interest limitation would not apply to interest paid in respect of a debt issued by a lender which is a PE of a non-resident, being a person engaged in the business of banking, in India.
• Acceptable Threshold Variance for Value of Immovable Property in case of Sec 43CA, 50C and 56(2)(x) of the Act, has been increased from 5 % to 10 %.
• To reduce litigation it is proposed to reduce the rate of TDS (u/s 194J) in case of Fee for technical services (other than professional Services) to 2 percent from existing rate of 10 percent. TDS rate u/s 194J will be same for other cases.
• Rationalization of tax treatment for Contribution made by Employer to Employee to mitigate tax: Total annual limit for contribution made by employer to the salary of employee under recognized PF and superannuation fund along with deduction to employee under NPS scheme for contribution by employer is proposed to be capped at Rs. 7.5 Lacs to limit the undue benefit given by employer to high salary income employees.
• Amendment in DRP (Sec 144C of the Act) : Amended to (i) include cases where the AO proposes to make any variation which is prejudicial to the interest of the assessee, within the ambit of section 144C; (ii) expand the scope of the said section by defining eligible assessee as a non-resident not being a company, or a foreign company.
• Deferment of SEP Provisions u/s 9 of the Act and Extension of Source Rule
• Definition of royalty amended u/s 9(1) (vi) of the Act to delete the words “but not include the consideration for the sale, distribution or exhibition of cinematographic films”, to be in alignment with International practice.
• PAN will be instantly issued with Aadhar through online application.
• Due Date of Corporate Tax Return and Filing of Tax Audit Report

(i) In order to enable pre filling of data in income tax return from tax audit it is proposed to amend the Sec 139(1) providing 31st October as due date for filing return instead of 30th September.

(ii) distinction between working and non-working partner of the firm removed with respect to the due date of filing return of income by partner of the firm.

• Amendment in Sec – 139 :Exemption for NR from filing Income Tax Return in case the NR is only earning income u/s 115A (a) dividend or interest (b) Royalty or FTS; and TDS as per applicable rates is deducted and NR is not required to pay any other tax.
• Attribution of profits to PE of a NR now will also be covered under Safe Harbor Rules and APA also to reduce the litigation
• A total of 4.83 direct tax cases pending in various forums. So a new direct tax dispute settlement under ‘Vivad se Vishwaas Scheme’ is launched. No penalty will be charged if taxpayers pay by March 31, 2020.Here, only disputed tax amount has to be paid.
• It is now proposed to amend the provisions of section 115BAA and section 115BAB to not allow deduction under any provisions of Chapter VI-A other than section 80JJAA or section 80M, in case of domestic companies opting for taxation under these sections.