Summary of Direct Tax Proposals Budget 2020

DIRECT TAX PROPOSALS

♦ New Tax Slabs for Individuals and HUF (Section 115BAC)

Finance Bill proposes to give an option to Individuals and HUF to compute the tax liable on income earned at the rate and as per the procedure mentioned below:

Conditions which needs to be satisfied to opt for taxation under the New Regime:

• No exemptions or deductions to be allowed such as leave travel concession, house rent allowance, standard deduction, interest on housing loan (for self-occupied property or vacant property), deduction under Chapter VI-A (eg. insurance, PPF payments, mediclaim premiums, donations, etc) except contribution to National Pension Scheme, deduction under section 80JJAA for new employees and deduction under section 80LA in respect of IFSC unit
• Brought forward loss or unabsorbed depreciation pertaining to above deductions, would not be available for set off
• No exemption or deduction to be claimed for any other allowances or perquisites
• Loss under the head house property would not be allowed for set off against any other head of income
• The option under the new taxation regime to be exercised by the taxpayer as follows:

– In case of individuals, HUFs having business income, option to be exercised while filing return of The option once exercised shall apply to subsequent years. Withdrawal from this option is permitted only once

– In case of individuals, HUFs having no business income, option to be exercised annually while filing return of income

– In case any of the conditions specified under the new taxation regime is not satisfied by the taxpayer, such taxpayer to be liable to tax as per the existing provisions

– Provisions relating to AMT would not be applicable to taxpayers under the new taxation Regime

For Co-operative Society

• Concessional tax rate @22% to Co-operative Societies without availing any exemptions and not required to pay any AMT.

Tax on income of certain domestic companies (Section 115BAA & 115BAB)

• Taxation of domestic companies at concessional rates is subject to non availment of specified deductions and incentives. Now, such benefit of concessional rate shall be available if the company after allowing the deductions under section 80JJAA or Section 80M.
• Also, the benefit of concessional tax rates under these sections, are also extended to “Power Generation Companies”.

Conceptual hand writing showing Budget 2020. Concept meaning estimate of income and expenditure for next or current year Businessman Hand Holding and Pointing Colorful Tablet Screen

Tax Audit

• Tax Audit turnover thresholdu/s 44AB increased from Rs.1 crore to Rs. 5 crores, provided tax payer should not transact more than 5% of business transactions in cash.
• So now the Enterprise has to prepare payment and receipt account so as to see whether cash transactions (both for are not more than 5% to take the benefit of enhanced limit. Receipt and payment is to be checked separately to ensure the above limit of 5%.
• Finance bill proposes that, tax Audit Report to be filed 1 month prior to the due date applicable for filing the return of income.

Accordingly, the due dates for filing the Tax Audit Report to be 30 September (31 October in cases where Transfer Pricing provisions are applicable)

• Corresponding changes have been proposed in various sections which require filing of mandatory certificates / reports in order to align the aforesaid timeline (like MAT Certificate in form 29B and slump sales certificate under section 50B etc……)
• Also Finance Bill proposes to remove the distinction between a working and a non-working partner of a firm with respect to the due date as mentioned in sub-clause (iii) of clause (a) of Explanation 2 of sub-section (1) of Section 139 of the Act.

Taxation of Perquisite (Amendment in Section 17)

• A combined upper limit of Rs. 7.50 lakh per employee per year has been proposed in respect of Employer’s Contribution to NPS, Superannuation Fund and Recognised Provident fund and any excess contribution would to be taxable in the hands of employees.

• Consequently, annual accretion of interest, dividend or any other amounts of similar nature on such taxable Employer’s Contribution to be taxable as perquisite.

Amendment in Section 6 relating to Residential Status of Individual and HUF

• An Indian citizen or PIO, who is outside India, to be considered as a resident in India, inter- alia, if his period of stay while on a visit to India is 120 days or more during the said Finance Year (as 9against 182 days or more as per existing provisions)

• An Individual being Indian citizen shall be deemed to be a resident in India, if such individual is not liable to tax in any other country or territory by reason of his domicile, residence or any other criteria of similar

• Individual or HUF shall be considered as “not ordinarily resident” in India, if such individual or manager of such HUF is a non-resident in India for 7 out of 10 preceding years (as against 9 out of 10 preceding years as per existing provisions).

• Alternate condition of stay in India upto 729 days in preceding 7 years has been deleted now.

Tax on dividends

• Dividend distribution tax (DDT) would not applicable from 1st day of April, 2020. (Section 115-O)
• Consequently Section 115BBDA, wherein dividend exceeding Rs. 10 lakhs were taxed would be not effective after 31st March 2020.
• Dividend income received from domestic company shall be taxable in the hands of shareholders at normal applicable tax
• However, if the recipient domestic company distributes dividend to another domestic company on or before 1 month prior to the due date of furnishing the return of income, then such original recipient will get deduction to the extent of dividend so
• Further, No deduction shall be allowed from dividend income, or income in respect of units of mutual fund or specified company, other than deduction on account of interest expense and in any previous year such deduction shall not exceed twenty per cent. of the dividend income or income from units included in the total income for that year without deduction under section 57. (Amendment to Section 57)
• Only interest expense allowed as a deduction upto 20% of the dividend
• No set off is available for dividend received from foreign
• Foreign shareholders to pay tax at 20% under the Act (subject to availability of treaty benefits). No interest deduction
• Domestic company making any payment of dividend (including dividend on preference shares), in any mode, to any Indian resident, would be required to deduct tax @10% (Section 194)
• TDS is not required to be deducted in case, the dividend is paid by any mode other than cash and such dividend does not exceed INR 5,000.

Signing and due dated of Return of income

• Due date of filing of return of income in case of specified taxpayers to be October 31 (instead of September 30)
• Finance Bill also proposes to amend clause (c) and (cd) of section 140 of the Act so as to enable any other person, as may be prescribed by the Board to verify the return of income in the cases of a company and a limited liability partnership.

Modification of e-assessment scheme (Section 143(3A))

• Faceless assessment proceedings is proposed to be further extended to CIT(A)/ penalty proceedings and best judgement assessments made u/s section 144

Amendment in Dispute Resolution Panel (DRP) (Section 144C)

Section 144C of the Act provides that in case of certain eligible assessees, viz., foreign companies and any person in whose case transfer pricing adjustments have been made under sub-section (3) of section 92CA of the Act, the Assessing Officer (AO) is required to forward a draft assessment order to the eligible assessee, if he proposes to make any variation in the income or loss returned which is prejudicial to the interest of such assessee. Such eligible assessee with respect to such variation may file his objection to the DRP, a collegium of three Principal Commissioners or Commissioners of Income-tax. DRP has nine months to pass directions which are binding on the AO.

Finance bill proposes to suitably amend section 144C so that:-

• The right to approach the DRP to be available to all non-residents (earlier available only to a foreign company)
• An eligible taxpayer can also file objections with DRP for any variations carried out by the AO (slated to be effective for orders passed on or after April 1, 2020)

Clarity on provision related to stay by ITAT

• ITAT may grant stay of demand provided the taxpayer deposits atleast 20% of the amount of tax (including interest, fee, penalty, any other sum payable under the provisions of the Act) or furnish security of equal amount in respect thereof.
• Further, no extension of stay shall be granted by ITAT if the appeal is not disposed within the period of stay unless the taxpayer deposits atleast 20% of the amount or furnish security of equal amount in respect thereof.
• The total stay granted by ITAT cannot exceed 365 days.

Penalty for fake invoice (to be effective from April 1, 2020)

It is proposed to introduce a new provision in the Act to provide for a levy of penalty on a person, if it is found during any proceeding under the Act that in the books of accounts maintained by him there is a (i) false entry or (ii) any entry relevant for computation of total income of such person has been omitted to evade tax liability.

The penalty payable by such person shall be equal to the aggregate amount of false entries or omitted entry.

It is also propose 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. The false entries is proposed to include use or intention to use –

(a) forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or

(b) invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both; or

(c) invoice in respect of supply or receipt of goods or services or both to or from a person who do not exist.

Tax Collection at Source

Section 206C has been amended as under

* TDS is required to be deducted at the receipt of Payment and in other two cases Debit in the books of accounts or receipt of payment, whichever is earlier

Charitable Trusts and Institutions

• With a view to make the process of registration electronic and simple, new procedure for tax exemption introduced from June 1, 2020. Application to be made within specified time for respective cases
• Application for renewal of registration to be made within the prescribed time limit
• All registrations (renewal and new) to be limited to a period of 5 years (hitherto granted for perpetuity)
• New charitable institutions which are yet to commence their charitable activities to be granted a provisional registration valid for 3
• All other existing provisions for cancellation of registration incorporated in the new procedure

Exemption to approved authorities, trusts, etc.

• As per existing provisions, a taxpayer who was denied exemption under section 11 could opt for beneficial provisions of section 10(23C) i.e. approved funds / institutions. This benefit is now extended to Government approved authorities, trusts etc under section 10(46).

• Assessee now to claim exemption either under section 10(23C) / 10(46) or under section
• If assessee has registration under S. 12A as well as S. 10(23C) or S. 10(46), then registration u/s 12A would become inoperative from the date registration u /s. 10(23C) or S. 10(46) was made from the commencement of this provision.
• New registration procedure (similar to charitable trusts)

Deduction under section 80G

• Donee to furnish prescribed statements to tax authorities and also to provide the donor a certificate regarding the donation received
• Fee for default in furnishing the statement / certificate to be INR 200 per day

Capital Gains

Under the existing provisions of section 55 of the Act, for computing capital gains in respect of an asset acquired before 1st April, 2001, the assessee has been allowed an option of either to take the fair market value of the asset as on 1st April, 2001 or the actual cost of the asset as cost of acquisition.

Finance bill proposes to insert an explanation under clause (ac) of sub-section (2) of the said section to provide that in case of a capital asset, being land or building or both, the fair market value of such an asset on 1st April, 2001 shall not exceed the stamp duty value of such asset as on  1st April, 2001 where such stamp duty value is available.

Business Trusts

• Tax-pass through status proposed for unlisted private business trust by doing away with the mandatory listing requirement
• Dividend income earned by business trust to be taxable in the hands of unit holders on pass- through basis
• Business trust to withhold taxes at 10% on distribution of income which are in the nature of dividends

Modification of the definition of “business trust”

Under the existing Section 115UA of the Act, the total income of the trust, excluding capital gains income is charged at the maximum marginal rate. Further, the income by way of interest and rent, received by the business trust from a Special Purpose Vehicle (SPV) is accorded pass through treatment i.e. there is no taxation of such interest or rental income in the hands of the trust and no withholding tax at the level of SPV.

But as per the definition of “business trust” there was mandatory listing requirement of the trust to get the benefit of the above provision. But now Tax-pass through status proposed for unlisted private business trust by doing away with the mandatory listing requirement.

However, dividend income earned by business trust to be taxable in the hands of unit holders on pass- through basis but business trust to withhold taxes at 10% on distribution of income which are in the nature of dividends

International Tax

Amendment in definition of royalty

Finance bill proposed to amend clause (v) of Explanation 2 (definition of royalty) so as to provide that the consideration for the sale, distribution or exhibition of cinematographic films shall not be excluded from definition of royalty which was earlier specifically excluded from the definition of royalty.

Widening of source rule (effective from AY 2021-22)

• In order to widening the source rule taxation, it is proposed to insert a new Explanation 3A so as to declare that the income attributable to operations carried out in India, as referred to in Explanation 1 of clause (i) of sub-section (1) of said section, shall include income from––

• such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;

• sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and

• sale of goods and services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.

Tax treaty related measures

• Provisions of section 90 and section 90A to be amended to align with the preamble of MLI i.e. tax treaties may be entered into by the Government without creating any opportunities for non-taxation or reduced taxation (including through treaty shopping, tax evasion or avoidance which indirectly benefits residents of any other country)

Deferring of Significant Economic Presence (SEP),

• In backdrop of on-going discussions in G-20 –OECD BEPS project, the existing provisions relating to SEP are proposed to be deferred to 1^st April 2022    e. it  will now apply from AY 2022-23 and onwards

Exemption from filing of income tax return by non-residents

• Under the current provisions of section 115A of the Act provide relief to non-residents from filing of return of income where the non-resident is not liable to pay tax other than the TDS which has been deducted on the dividend or interest income, the same relief has not been extended to non-residents whose total income consists only of the income by way of royalty or FTS.

Taxation of non-residents

• CBDT is empowered by amending Section 295 of the Act, to make rules for determining the manner in which and the procedure by which the income of a non-resident with respect to its India operations and to determine income for transaction or activities of a non- resident

Taxability of income from Mutual Funds

• Income distributed by Mutual Fund to be taxable in the hands of the unit holders at applicable tax rates
• Beneficial tax rate of 5% for non-residents on income distributed by infrastructure debt funds no longer available

Rationalization of provisions of start-up (Section 80-IAC)

The existing provisions of section 80-IAC of the Act provide for a deduction of an amount equal to one hundred per cent of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of seven years, at the option of the assessee, subject to the condition that the eligible start-up is incorporated on or after1st April, 2016 but before 1st April, 2021 and the total turnover of its business does not exceed twenty-five crore rupees.

In order to further rationalise the provisions relating to start-ups, following amendment has been made:-

• The turnover threshold for claiming tax holiday increased from Rs 25 Crores to Rs 1,00 Crores million
• The time limit within which the 3 year tax holiday can be claimed is increased from 7 years to 10 years

Incentives for Real Estate Sector

• Safe harbour limit for sale / receipt of immovable property increased from 5% to 10%
• The time-limit for approval of affordable housing project for availing tax holiday by the developers and builders extended to March 31, 2021
• Similarly, Government extended the time limit to avail additional Rs.1.50 lakhs deduction towards interest on affordable housing loans till 31-Mar-2021.

Providing an option to the assessee for not availing deduction under section 35AD.

Claiming deduction of 100% of capital expenditure (other than land, goodwill and financial assets) for specified business to be optional and companies opting for concessional tax regime (and thus not claiming deduction under section 35AD) shall be entitled to claim normal depreciation

Tax Deduction at Source (TDS)/ Withholding Tax Amendment

Deferring TDS on ESOP

In order to ease the burden of payment of taxes by the employees of the eligible start-ups or TDS by the start-up employer, it is proposed to amend section 192 of the Act as under:-,

Payment of tax / withholding of tax on ESOPs/ sweat equity to employees deferred from date of exercise to the earliest of the following –

– Expiry of 48 months from the end of AY in which the ESOPs/ sweat equity were allotted

– Sale of said shares/ securities by the employee

– Cessation of employment in such a start-up

The perquisite income from ESOPs/ sweat equity will continue to be taxable at the tax rates applicable in the year of allotment of shares/ securities.

TDS on E-commerce transactions through insertion of a new section 194-O

• E-commerce operator to withhold tax on amount paid or credited to e-commerce participant

• Section 194-O proposes for 1% TDS rate on the gross amount of sales of goods or services facilitated by e-commerce operators through digital or electronic platform to the participants.

• The TDS rate of 1% would apply either at the time of credit to e-commerce participants or payment by any mode or where purchaser of goods or services makes payment directly to e-commerce participants.

• No such deduction is required in case of an individual or HUF, where the aggregate gross sale of goods or services or both is not likely to exceed Rs 5 lacs during the FY and such person has furnished a PAN or an Aadhar to the e-commerce operator.

• If the deductee do not provide PAN/ Aadhaar then TDS will be deducted at the rate 5 percent. Further, Section 206AA has been amended to clarify that if the TDS liability arises due to Section 194-O, the higher rate of 5% shall be levied instead of 20% for not providing PAN for the purpose of TDS deduction.

• Withholding tax obligation to continue to apply on payments made to e-commerce operator for hosting advertisements or providing unrelated services.

Reduced rate of TDS on fees for technical services (other than professional services)

Under section 194J in order to reduce litigation, TDS rate is reduced in case of fees for technical services (other than professional services) to two per cent from existing ten per cent. The TDS rate in other cases under section 194J would remain same at ten per cent.

Other Tax Deduction at Source (TDS)/ Withholding Tax Amendment

Section 194A is being amended to provide a cooperative society having turnover exceeding Rs. 50 crores during the financial year immediately preceding the financial year in which interest is paid and the amount of interest, is more than Rs. 40000 (Rs 50,000, in case of senior citizen) require to deduct TDS on the interest amount as per the provisions of this section.

Section 194C is being amended to cover individual or a Hindu undivided family or an association of persons or a body of individuals has total sales, gross receipts or turnover from business or profession carried on by him exceeding one crore rupees in case of business or fifty lakh rupees in case of profession. Earlier the same is required to deduct the TDS if they are liable to audit of accounts under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year. Similar change for requirement for TDS applicability has been made in Sections 194A, 194H, 194I, 194J and 206C too.

Also definition of “Work” is amended 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.

Earlier manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer was included within the definition. But now associate word has been included.

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.

Section 194 is being amended to provide for a TDS deduction @ 10% by a company before making any payment of dividend by any mode if the amount of dividend exceeds Rs. 5000. Earlier the required to deduct TDS at the specified rate, if the amount of dividend exceeds Rs. 2500.

Section 194K: This new section provides that TDS at 10% shall be deducted by a person responsible for paying to a resident any income by any mode in respect of units of a Mutual Fund or units from the administrator of the specified undertaking or units from the specified company at the time of payment if the amount exceeds Rs 5,000/-.

Section 194LBA has been amended to increase the rate of TDS from 5% to 10% in case of dividend paid by a business trust to a non-resident (not being a company) or a foreign company.

Section 194LC

This section has been amended to provide that TDS on interest on monies borrowed by an India Company by issue of any Long term bond or rupee denominated bond shall be deducted at 4%.

Such money should be borrowed between 01.04.2020 and 01.07.2023 and such bonds should be listed on a recognized stock exchange located in any international financial services centre.

Further, the period of said concessional rate of TDS of 5% is being extended to 1st July, 2023 from 1st July, 2020.

Section 194LD deals with the TDS Liability of the Assessee who is paying Interest on Rupee dominated bonds, Government Securities to a Foreign Institutional Investor or Qualified Foreign Investor on or after 1st June 2013 but before 1st July 2023 (earlier 2020).

• The applicability of the section has been extended to investment in Municipal Debt Securities (as per SEBI Act, 1992), where the interest has been paid on or after 1st April 2020 but before 1st July 2023.
• Rate of TDS remains same at 5%.

Section 196D has been amended to clarify that payments, of Income payable to a Foreign Institutional Investor, made by any mode (earlier by cash or by the issue of a cheque or draft or by any other mode) shall be subject to TDS at the rate of 20%.

Further, Dividend Distribution Tax liability under the section has also been deleted.

Other Provisions

• Similar to Sabka Vishwas Scheme under GST, Vivad se Vishwaas Scheme introduced in Income Tax Act. Under this scheme, appeals pending before different forums will be withdrawn if tax payer pays disputed tax amount on or before 31-Mar-2020 and no interest or penalty will be charged. Further, this scheme available till 30-June-2020 provided tax payer has to be pay additional amount over and above disputed tax.

• Government propose to amend Income Tax Act to allow faceless appeals against tax orders similar to faceless assessment.

• Government proposed to introduce new process for instant allotment of PANon the basis of Aadhaar.

• Taxpayers Charter (enumerating their rights) to be enshrined in the Act

• Government propose to simply the ITR forms which will pre-fillthe details of donee to avail deduction u/s 80G.

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