Union Budget 2020-2021 : Analysis of Income Tax Proposals

The first Union Budget of the new decade (second one of Prime Minister Shri Narendra Modi led Government, in the Second Innings) presented by the Finance Minister Smt. Nirmala Sitharaman on 1^st February 2020; took most by surprise; with some of the radical Income tax reforms and belying some expectations.

The Radical tax reforms includes proposals in respect of new simple tax regime with lower tax rates in lieu of forgoing deductions; withdrawing levy of Dividend Distribution Tax on companies/Mutual Funds and shifting it to Share-Holders /Unit-Holders; efforts to improve and digitalize systems and processes to levy and collection tax with increased use of data analytics and reduction in human interface.

Also, the Budget does not include so called small print devils and many retrospective amendments.

Contrary to expectations about short term measures, to lift the sagging economy with poor GDP Growth numbers; the Government seem to be focused on long term structural measures, containing Fiscal Deficit to 3.5 % of GDP and reducing Government Borrowings.

The Finance Minister has commended this Budget to build a new India on the pillars of Aspiration, Economic Development and Caring Society.

As in the earlier years, we have made humble attempt to lucidly present in the following paragraphs; our analysis of some of the salient tax proposals, to enable you to grasp them easily.

As of date, these are proposals only, and if adopted by the Parliament and passed as Finance Act; will come into force for and from Assessment Year 2021-2022 relevant to Financial Year 2020-2021, unless specifically provided otherwise.

I. DIRECT TAXES

Amendments proposed under the Income-tax Act, 1961 (hereafter referred to as “the Act”).

A. Rates of Tax

1. Based on the type of Assessee, the changes in rates of taxation is given below:

For Individuals and HUF’s:

Apart from continuing with the existing Basic Exemption Limit, Income Slabs, Surcharge and Health and Education Cess as applicable for Financial Year 2019-20 (‘Old Regime’), the Finance Minister has provided an alternative regime of taxation for Individuals and HUF’s with lower tax rates and income slabs subject to condition of foregoing certain exemptions, deduction, losses (‘New Regime’); and given Assessee’s an option to choose which regime they would want to follow. The complete detail about the new regime, with illustration about likely tax liability in both regimes and the differential impact in tax liability on opting the new regime vis-à-vis the old one is given below:

Basic exemption and Income Slabs for Financial Year 2020-21 in New Regime
Total Income (Refer Note1 below)	Tax Rate
upto Rs.2,50,000/-	Nil
Rs.2,50,001/- to Rs.5,00,000/-	5% of income above Rs.2,50,001/-
Rs.5,00,001/- to Rs.7,50,000/-	Rs.12,500/- plus 10% of income above Rs.5,00,001/-
Rs.7,50,001/- to Rs.10,00,000/-	Rs.37,500/- plus 15% of income above Rs.7,50,001/-
Rs.10,00,001/- to Rs.12,50,000/-	Rs.75,000/- plus 20% of income above Rs.10,00,001/-
Rs.12,50,001/- to Rs.15,00,000/-	Rs.1,25,000/- plus 25% of income above Rs.12,50,001/-
Above Rs.15,00,001/-	Rs.1,87,500/- plus 30% of income above Rs.15,00,001/-

There is no change in Surcharge and Health and Cess in the new regime, and the same continues as applicable for Financial Year 2019-20.

Note 1: The Total Income under the New Regime would have to be computed by foregoing the following deductions/ exemptions/ set-off of losses:

• Leave travel concession in Section 10(5);
• House rent allowance in Section 10(13A);
• Some of the allowance as contained in Section 10(14);
• Allowances to MPs/MLAs in Section 10(17);
• Allowance for minor’s income in Section 10(32);
• Exemption for SEZ unit in Section 10AA;
• Standard deduction, deduction for entertainment allowance and professional tax in Section 16;
• Interest in Section 24 in respect of self-occupied properties referred to in Section 23(2).
• Set-off of Loss under the head income from house property from rented property would not be allowed to be set off against income under any other head in that year and same would have to be carried forward to be claimed under the old regime in future subject to Section 71B;
• Additional deprecation in Section 32(1)(iia);
• Deductions in Section 32AD, 33AB, 33ABA;
• Various deduction for donation for or expenditure on scientific research in Section 35;
• Deduction in Section 35AD and Section 35CCC;
• Deduction from family pension in Section 57(iia);
• All deduction under chapter VIA except Section 80CCD and Section 80JJAA which would be allowable in new regime.

Note 2: If an Individual having Total Income upto Rs.5 Lakhs opts to go for New Regime, he would continue to be eligible to claim Rebate under Section 87A which is maximum of Rs.12,500/-.

For your ready reference, we give herein below the illustrative tax liability (excluding Surcharge and Health and Education Cess) in both Regimes for different income categories and the differential impact in tax liability on opting the New regime vis-à-vis the Old Regime:

Total Income Upto	Tax Liability in Old Regime, after (Rs.)
	Deduction under Salary, Housing loan Interest and Section 80C Investment (Rs.50,000 + 2,00,000 +1,50,000)	Deduction under Salary and 80C Investment (Rs.50,000 +1,50,000)	Deduction under 80C Investment (Rs. 1,50,000)	No Deduction under (1), (2) and (3)
(1)	(2)	(3)	(4)	(5)
Rs.2,50,000/-	Nil	Nil	Nil	Nil
Rs.5,00,000/- (after Deduction U/s.87A)	Nil	Nil	Nil	Nil
Rs.7,50,000	NIl	22,500	32,500	62,500
Rs.10,00,000	32,500	72,500	82,500	1,12,500
Rs.12,50,000	82,500	1,42,500	1,42,500	1,87,500
Rs.15,00,000	1,42,500	2,02,500	2,17,500	2,62,500
Rs.20,00,000	2,92,500	3,52,500	3,67,500	4,12,500

–

Tax Liability in New Regime (Rs.)	Additional Liability /(Saving) in Tax on shifting to New Regime
	Deduction under Salary, Housing loan Interest and Section 80C Investment (Rs.50,000 + 2,00,000 +1,50,000)	Deduction under Salary and 80C Investment (Rs.50,000 +1,50,000)	Deduction under 80C Investment (Rs. 1,50,000)	No Deduction under (1), (2) and (3)
(6)	(7=(6-2))	(7=(6-3))	(7=(6-4))	(7=(6-5))
Nil	Nil	Nil	Nil	Nil
Nil	Nil	Nil	Nil	Nil
37,500	37,500	15,000	5,000	(25,000)
75,000	42,500	2,500	(7,500)	(37,500)
1,25,000	42,500	(2,500)	(17,500)	(62,500)
1,87,500	45,000	(15,000)	(30,000)	(75,000)
3,37,500	45,000	(15,000)	(30,000)	(75,000)

So, it is advisable to prepare computation of income and tax liability under both regimes and then decide which one is beneficial after considering specific facts and circumstances of each case.

For Domestic companies:

Post last year’s Budget, the Finance Minister had introduced Section 115BAA and Section 115BAB in the Finance Act, 2019 through the Taxation Laws (Amendment) Act, 2019 which gave option to specified domestic companies to pay tax @22% or 15% (plus Surcharge @10% plus Health and Education Cess @4%) subject to fulfilment of certain conditions like foregoing to specified deductions, losses etc.

Now, the Finance Minister has proposed to extend the benefit of lower rate of taxation @15% plus Surcharge and Health and Education Cess in Section 115BAB to domestic companies engaged in the business of generation of electricity.

For domestic companies not opting to take benefit of Section 115BAA or Section 115BAB, the existing tax rate @ 25% (for having Turnover or Gross Receipts less than Rs.400 Crores in the Financial Year 2018-19 or 30% (plus Surcharge and Health and Education Cess) continues to apply in Financial Year 2020-21.

No change are proposed in rates for taxation of Foreign companies and other entities except Co-Operative societies (Refer point No. 3 below).

2. New Deduction in respect of Inter-Corporate Dividend allowable to domestic companies declaring Dividend:

The Finance Minister has proposed to allow the domestic companies distributing Dividend, a deduction from their Total Income in respect of Dividend received by such company from other domestic companies. This deduction is available, to the extent of Dividend distributed by such company upto the period of one month prior to the date of filing return of income for that year.

Illustration:

Say, a domestic company has taxable income of Rs.100 which includes Rs.50 being Dividend received from other domestic companies and if such company has distributed Dividend of Rs.20 prior to one month from the due date of filing the return of income as applicable to the Company; then such company would be eligible to claim deduction of Rs.20 from their total income. Thus, the taxable income would be Rs.80.

Further, the Finance Minister has stated that the above deduction would also be allowed to domestic companies opting to go for taxation as per Section 115BAA or Section 115BAB who were not eligible for any deduction under Chapter VI-A in heading “C.—Deductions in respect of certain incomes” except Section 80JJAA.

3. Benefit of lower rate of taxation in case of specified companies extended to Co-operative societies:

With a view to extend the benefit of concessional taxation regime to co-operative societies on the lines as done for companies under Section 115BAA of the Act, the Finance Minister has proposed to give an option to the resident co-operative societies to pay tax @22% plus Surcharge @10% plus applicable Cess by insertion of new Section 115BAD in the Act.

Also, it is proposed to keep such societies opting for the above scheme outside the purview of Alternate Minimum Tax (‘AMT’) regime.

For co-operative societies not opting to take benefit of Section 115BAD of the Act, the existing tax rate continues to apply in Financial Year 2020-21.

Consequential amendments are proposed in Section 115JC and Section 115JD of the Act.

4. Relaxation in conditions of special taxation regime for offshore funds:

With the intention of giving boost to Fund management activities in India, the Finance Minister has proposed to remove certain deterrents by proposing to amend Section 9A of the Act, so as to provide that:

a) for the purpose of calculation of the aggregate participation or investment in the Fund, directly or indirectly, by Indian resident, contribution of the eligible Fund Manager during first three years up to Rs.25 Crores shall not be accounted for; and

b) if the Fund has been established or incorporated in the previous year, the condition of monthly average of the corpus of the fund to be Rs.100 Crores shall be fulfilled within twelve months from the last day of the month of its establishment or incorporation.

(The above amendment is applicable retrospectively and would take effect from Assessment Year 2020-21.)

5. Incentives to attract further investment by way of foreign borrowings:

With an objective of attracting fresh foreign borrowings to create jobs and stimulate the Indian economy, the Finance Minister has proposed the following measures:

> Section 194LC:

• To extend the period of concessional rate of TDS @5% till 1^st July, 2023 as against present 1^st July, 2020;
• TDS shall be done @ 4% (as against current 5%) on the interest payable to a non-resident in respect of specified Bonds issued on or after 1^st April, 2020 but before 1^st July, 2023 and which are listed only on a recognized stock exchange located in any IFSC.

> Section 194LD:

• To extend the period of concessional rate of TDS @5% till 1^st July, 2023 as against present 1^st July, 2020;
• TDS @ 5% shall also apply on the interest payable to a Foreign Institutional Investors and Qualified Foreign Investors on or after 1^st April, 2020 but before 1^st July, 2023 in respect of investment in Municipal Debt Security.

6. Clarification about Option to Assessee under Section 35AD:

With a view to clarify the intent that deduction under Section 35AD is optional to Assessee; and hence if an eligible company opts for the concessional regime under Section 115BAA or Section 115BAB, the benefit of depreciation as a deduction would still be available to the Assessee , suitable amendments are proposed in Section 35AD.

7. Welcome Clarification for Non-Residents on whose income is subject to TDS-Not required to file return of Income:

The Finance Minister has proposed to extend further relief to Non-Residents tax payers by not requiring them to file return of income in India in respect of income earned by way of royalty or fees for technical services, if TDS has been done thereon at rates which are not lower than the rates prescribed under Section 115A of the Act.

This implies that, if TDS is done as per DTAA rates which are lower than the rate prescribed in Section 115A, then the non-resident would have to file return of income in India in respect of above income.

Hitherto, this relief was available only in respect of Dividend/ Interest income earned by non-residents.

(The above amendment is retrospective and would apply from Assessment Year 2020-21.)

8. Deferring the liability of TDS on ESOP in case of eligible Start-Ups:

Presently, the taxation of ESOP in hands of employees is done at different points of time, as under:

• Tax on perquisite value, at the time of exercise of option by employee;
• Tax on Capital Gain arising from sale of shares, at the time of sale thereof.

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 defer the taxation of perquisite value on exercise of option, as under (at the earliest of any event):

• after the expiry of forty-eight months from the end of the relevant assessment year i.e. in 5^th year after exercise of option; or
• from the date of the sale of such specified security or sweat equity share by the Assessee; or
• from the date of which the Assessee ceases to be the employee of the person;

It is also provided that tax liability would be worked out on basis of rates in force of the financial year in which the said specified security or sweat equity share was allotted or transferred by the Assessee.

Consequential amendments are proposed in other sections.

One wonders as to why above benefit is only granted to eligible Start-ups and why not others?

9. Modifying definition of “business trust” in light of amended SEBI Regulations:

To maintain parity in treatment of taxation given to the private unlisted Infrastructure Investment Trust (‘InvIT’s) vis a vis public listed InvIT’s, the Finance Minister has proposed to amend the definition of ‘business trust’ in Section 2(13A) of the Act to bring it in line with amended SEBI Regulations which have done away with the requirement of mandatory listing of such InvIT’s.

10. Welcome amendment in Safe Harbour Rules and Advance Pricing Agreement provisions:

As a step towards the Government’s effort to reduce overall litigation and disputes, the Finance Minister has proposed to include within the purview of Safe Harbour Rules as per section 92CB and Advance Pricing Agreement (‘APA’) scheme as per section 92CC , the matter of the attribution of income in case of a non-resident persons having Permanent Establishment in India as per requirement of Section 9(1)(i).

(The amendment in Section 92CB is retrospective and would apply from. Assessment Year 2020-21;

whereas the amendment with respect to APA would apply to an APA entered into on or after 1^st April 2020.

11. Reducing rate of TDS on fees for technical services (other than professional services):

Considering the large number of litigation on the issue of short deduction of TDS in cases where the Assessee does TDS on certain services at 2% under Section 194C whereas Officers claim that TDS ought to be done @10% under Section 194J of the Act; in order to reduce such litigation, it is proposed to reduce rate for TDS in Section 194J in case of fees for technical services (other than professional services) to 2% from existing 10%, other provisions being unchanged.

12. Enlarging the scope for tax deduction on interest income under section 194A:

In order to extend the scope of Section 194A requiring TDS on interest paid by large co-operative society to any member or any other cooperative society, it is proposed to provide that a specified co-operative society shall be liable to TDS under that section if:

• the total sales, gross receipts or turnover of the co-operative society exceeds Rs.50 Crores during the financial year immediately preceding the financial year in which the interest is credited or paid; and
• the amount of interest, or the aggregate of the amount of such interest, credited or paid, or is likely to be credited or paid, during the financial year is more than Rs.50,000/- in case of payee being a senior citizen and Rs.40,000/-, in any other case.

13. Rationalization of tax treatment of employer’s contribution to recognized provident funds, superannuation funds and national pension scheme:

At present, there is no combined upper limit for the purpose of deduction in respect of contribution made by the employer to provident funds, superannuation funds and national pension scheme. This is giving undue benefit to employees earning high salary income; being iniquitous and hence, not desirable.

Therefore, it is proposed to provide a combined upper limit of Rs.7.5 Lakhs in respect of employer’s contribution in a year to NPS, superannuation fund and recognized provident fund; and any excess contribution is proposed to be taxable.

Also, it is also proposed that any annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme may be treated as perquisite to the extent it relates to the employer’s contribution which is included in total income.

This would mean that say, if any, employer contributes Rs.20 Lakhs to Provident Fund, then the employee would have to offer to taxation as perquisite Rs.12.5 Lakhs and interest accrued thereon in each subsequent years. Thus, employers would have to keep tab of interest to be taxed as perquisite on year-to year basis.

14. Insertion of Taxpayer’s Charter in Statute:

It is proposed to insert a new section 119A in the Act to empower the Board to adopt and declare a Taxpayer’s Charter and issue such orders, instructions, directions or guidelines to other income-tax authorities as it may deem fit for the administration of Charter.

One would assume that the Charter proposed to be introduced in the Income Tax Act, 1961 would be legally enforceable and would provide for penalties/ other consequences for tax officials not following the charter. Else, the Charter though part of statute books would be toothless provision.

15. Amending definition of “work” in section 194C of the Act:

To bring clarity in the section and plug the leakage, it is proposed to amend the definition of “work” under section 194C to provide that in a contract manufacturing, wherein the raw material is provided by the Assessee or its associate shall fall within the purview of the ‘work’ under section 194C.

16. Rationalization of provisions of section 55 of the Act to compute cost of acquisition:

For computing capital gains in respect of an asset acquired before 1^st April, 2001, the Assessee has been allowed an option of either to take the fair market value of the asset as on 1^st April, 2001 or the actual cost of the asset as cost of acquisition.

In case of a capital asset, being land or building or both, it is proposed that the fair market value of such an asset on 1^st April, 2001 shall not exceed the stamp duty value of such asset as on 1st April, 2001 where such stamp duty value is available.

17. Rationalization of provisions relating to trust, institution and funds:

To ensure that the conditions of approval or registration or notification are adhered to by the respective Assessee, for want of continuance of exemption, it is proposed to grant the approval or registration or notification for exemption for a limited period, say for a period not exceeding five years at one time.

This would also be a reason for having a non-adversarial regime and not conducting roving inquiry in the affairs of the exempt entities on day to day basis, in general, as in any case they would be revisiting the concerned authorities for new registration before expiry of the period of exemption.

This new process needs to be followed by both existing and new exempt entities, detail of which is given hereunder:

> an entity approved, registered or notified under clause (23C) of section 10, section 12AA or section 35 of the Act, as the case may be, shall be required to apply for approval or registration or intimate regarding it being approved, as the case may be, and on doing so, the approval, registration or notification in respect of the entity shall be valid for a period not exceeding five previous years at one time calculated from 1^st April, 2020.

> 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.

> the application pending for approval, registration, as the case may be, shall be treated as application in accordance with the new provisions, wherever they are being provided for.

> deduction under section 80G/ 80GGA to a donor shall be allowed only if a statement is furnished by the donee who shall be required to furnish a statement in respect of donations received and in the event of failure to do so, fee and penalty shall be levied.

> similar to section 80G of the Act, deduction of cash donation under section 80GGA shall be restricted to Rs 2,000/- only.

> the entities receiving donation/ sum may be required 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;

> 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/ certificate.

Consequential amendments are proposed in other provisions of the Act.

18. Rationalization of provisions relating to segregated portfolios:

To give effect to SEBI Circular providing that all the existing unit holders in the affected scheme as on the day of the credit event shall be allotted equal number of units in the segregated portfolio as held in the main portfolio, and to provide clarity on taxation of capital gains; the following measures are proposed by the Finance Minister:

• in the case of a capital asset, being a unit or units in a segregated portfolio, referred to in new sub- section (2AG) of section 49, there shall be included the period for which the original unit or units in the main portfolio were held by the assessee;
• the cost of acquisition of a unit or units in the segregated portfolio shall be the amount which bears to the cost of acquisition of a unit or units held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios;
• the cost of the acquisition of the original units held by the unit holder in the main portfolio referred to in new sub- section (2AH) of section 49 shall be deemed to have been reduced by the amount as so arrived at under the proposed sub-section (2AG).

19. Vivaad-Se-Vishwas Scheme to settle pending Income-tax disputes:

After seeing the success of recently introduced Indirect Tax Dispute Settlement Scheme (Sabka Vishwas-Legacy Dispute Resolution Scheme), 2019; the Finance Minister has with a view to augment recovery of disputed demands and control the fiscal deficit, proposed to introduce similar scheme for settlement of Direct Tax disputes (Vivaad se Vishwas Scheme) wherein she has proposed to provide waiver of interest and penalty if the taxpayer pays the disputed taxes till 31^st March 2020. She also said that Assessee’s having pending appeals at any forum can take benefit of this scheme. However, the actual fine print of the scheme is awaited and same is expected to be released soon.

One will have to wait and watch for the actual fine print to decide whether it is beneficial to go for the scheme depending the facts and circumstances of each case.

20. Exemption in respect of income of Sovereign Wealth Fund and wholly owned subsidiary of Abu Dhabi Investment Authority:

To promote investment by Sovereign Wealth Funds(‘SWF’s) and by Abu Dhabi Investment Authority in India’s infrastructure, the Finance Minister has proposed to grant exemption in respect of Dividend, Interest and Capital Gains earned by specified entities in India, if the investment is made on or before 31^st March 2024 and held for at least three years.

Section 10(23FE) is introduced which provides conditions to be fulfilled by specified entities to take benefit of the exemption. However, further clarity is expected as to what constitutes ‘commercial activity’ as this is one of the conditions to be fulfilled and same is not defined; with a view to avoid undue litigation as to eligibility to qualify for the exemption.

21. Aligning exemption from taxability of Foreign Portfolio Investors on account of indirect transfer of assets, with amended scheme of SEBI:

Until now, the Category-I and Category –II Foreign Portfolio Investors (‘FPI’) were exempt from the indirect transfer provisions on account of transfer of shares/ units in such Funds whereas Category III FPI were subject to tax liability on account of indirect transfer.

However, with the recent change in FPI Regulations by SEBI, which now categories FPI’s only in 2 categories namely, Category-I and Category-II, as against 3 categories earlier; the Finance Minister has proposed to make suitable amendment in Explanation 5 to Section 9 to provide for the benefit of above exemption only to Category-I FPI’s in line SEBI Regulations.

Further, it is proposed to grandfather investments made prior to repeal of erstwhile SEBI FPI Regulations, 2014 i.e.  23^rd September 2019.

(This amendment is retrospective and would be applicable from AY 2020-21.)

22. Rationalizing the definition of Royalty:

With the objective of correcting the anomaly in definition of Royalty in the Income Tax Act, 1961 as against the treatment in DTAA which gives India the right to tax royalty being consideration for the sale, distribution or exhibition of cinematographic films; the Finance Minister has proposed amendment in Explanation 2 to Section 9 to levy tax on such income.

23. Deferring applicability of Significant Economic Presence as Business connection in India-Welcome clarification:

As the necessary decision on threshold for the aggregate amount of payments arising from the specified transactions and for the number of users which was required to be prescribed in the Rules is still under discussion in G20 and the OECD BEPS project report is expected by the end of December 2020; it is proposed to defer the applicability of SEP to starting from Assessment Year 2022-23.

Also, as per the discussion going on in international forum, countries generally agree that income from advertisement that targets Indian customers or income from sale of data collected from India or income from sale of goods and services using such data collected from India, needs to be accounted for in Indian revenue. Hence, it is proposed to amend the source rule to clarify this position.

24. Increase in Threshold limit for Tax Audit in case of persons doing Business:

In order to reduce compliance burden on small and medium businesses and to promote business through banking channels, the Finance Minister has proposed to increase the threshold limit from Rs.1 Crore to Rs.5 Crores; above which a person for a person carrying on business is required to get his books of account audited. The increased threshold limit is applicable only if following Two conditions are fulfilled:

(i) aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipts; and

(ii) aggregate of all payments in cash during the previous year does not exceed five per cent of such payments.

It may be noted that the above increased threshold is only applicable to persons carrying on business and that too for those not covered under presumptive taxation scheme of Section 44AD. There is no change in threshold under Section 44AB/ Section 44ADA of the Act for persons engaged in Profession.

25. Digitization to capture data on real-time basis and Enabling Pre-filing of returns for persons subject to Tax Audit: 

In furtherance of the Government’s efforts to capture transactional data of Assessee’s on real-time basis by use of technology like Artificial Intelligence, Machine Language etc. and to auto-populate the relevant details in return of income and to make the same available to Assessee’s; the Finance Minister has moved a step closer to this objective, by proposing to enable pre-filling of returns in case of persons having income from business or profession which are subject to Tax Audit.

To facilitate the above, the Finance Minister has proposed to require furnishing of the Tax Audit report by such persons in advance by at least one month prior to the due date of filing of return of income.

For this, suitable amendments are proposed in other Sections of the Act to require filing of reports earlier. 

The above amendment is retrospective and would apply from Assessment Year 2020-21. 

26. Postponement in due date of filing the Return of Income for persons who are subject to Audit under any law and change in threshold for doing TDS by such persons:

The due date for filing return of income under Section 139(1) for Assessee’s subject to audit is proposed to postponed from 30^th September to 31^st October.

Further, the Finance Minister has proposed to remove the distinction between a working and a non-working partner of a Firm as regards due date for filing return of income by partners of Firm subject to Tax Audit.

This is a welcome clarification and would go a long way in settling the controversy as to the due date of filing return of income by partners (who do not receive remuneration but only get share of profit/ loss) of a Firm which is subject to Tax Audit.

(The above amendment is retrospective and would apply from Assessment Year 2020-21.)

27. Changes in Thresholds for doing TDS/TCS by Individuals/ HUF:

The Finance Minister has enlarged scope of TDS/ TCS by proposing amendments in Sections 194A, 194C, 194H, 194I, 194J, and 206C required Individual/ HUF’s to comply with TDS/ TCS provisions, if their turnover/ gross receipts from business of profession exceeds Rs.1 Crore of Rs.50 Lakhs in the preceding year (whether they are subject to Tax Audit or not). 

28. Expanding the scope of TDS provisions to cover E-Commerce transactions:

In order to widen the tax base and to include E-commerce transactions within tax net, the Finance Minister has proposed to insert new Section 194-O requiring E-commerce Operator like Amazon, Flipkart, First Cry etc. to do TDS @ of 1% of gross consideration for sale of goods/ service from the amounts payable to E-commerce participants who are using the platform of such E-commerce Operators.

Further, to avoid hardship to small and medium entrepreneurs from requirement of TDS, it is proposed to keep out those Individual/ HUF E-commerce participants whose aggregate business turnover from the E-commerce Operator in the financial year does not exceed Rs.5 Lakhs on the condition that PAN/ Aadhar has been furnished by such the Individual/ HUF to the E-commerce Operator.

Also, the Finance Minister has proposed that TDS required to be done by E-Commerce Operators from amounts payable to E-commerce Participants @5% in absence of PAN (as against the present rate of 20% in Section 206AA).

Consequential amendments are also proposed in Section 197 and Section 204.

29. Expanding the scope of TDS provisions to cover transactions of Dividend payable by domestic companies/ Mutual Funds: 

With the objective of transferring the incidence of the tax on income by way Dividend from domestic companies and from Mutual Funds to the shareholders/ unit-holders, the Finance Minister has proposed to insert a new Sections 194 and 194K requiring the company/ Mutual Fund to deduct TDS @10% from Dividends payable to resident shareholders/ unitholders, if the aggregate amount payable in the financial year exceeds the threshold of Rs.5,000/- per person.

The benefit of submitting Form No.15G/ 15H by Individual for non-deduction of TDS would continue to be available.

30. Increase in Safe Harbour Limit in Section 43CA, 50C and 56 of the Act to 10% from existing 5%:

In order to reduce hardship faced genuine taxpayers due to difference in valuation of property as per Stamp Valuation Authority and transaction value, the Finance Minister has proposed to increase the tolerable difference from earlier 5% to 10% of the transaction value.

Consequential amendment is proposed in Section 43CA, 50C and 56 of the Act to give effect to the above.

The Finance Bill states that the above clarification would be applicable from Assessment Year 2021-22. However, once can consider to apply the above beneficial provision which are introduced to reduce hardship of taxpayers retrospectively by using the ratio of Supreme Court in cases of M/s. Calcutta Export Company (302 CTR 201) and Alom Extrusions Ltd. (319 ITR 316).

31. Dividend Distribution Tax Abolished-Dividends now taxable in hands of shareholders’/unit holders:

Hitherto, domestic companies/ Mutual Funds were required to pay Dividend Distribution Tax (‘DDT’) on Dividends distributed as per the provisions of Section 115-O/ 115-R of the Act. The Dividend on shares were exempt in the hands of shareholder to the extent of Rs.10 Lakhs in case of Individual/ HUF and Dividend on units of Mutual Fund was exempt completely for all Assesses.

Now, the Finance Minister has proposed to abolish DDT and have dividends taxable in hands of the shareholders’/unit holders at the rates applicable to respective Assessee.

Further, it is proposed amend Section 57 appropriately such that in respect of Dividend income, an Assessee will only be eligible to claim deduction of interest expenditure and that too maximum to the extent of 20% of dividend income earned in the financial year.

However, the Deduction proposed in Section 80M to domestic companies (Refer point No. 2 above) would continue to be available in addition to deduction for interest, as above.

Consequential amendments are proposed in other sections of the Act.

The above proposal of the Finance Minister may result in end of litigation for many corporates who have filed appeals for Disallowance u/s.14A in respect of exempt income earned by way of Dividend from shares/ units of Mutual Funds by deployment of surplus funds which are not immediately required in the business.

Also, hitherto non-residents were unable to claim Foreign Tax Credit (‘FTC’) in respect of DDT paid in India. However, now such non-residents would have to offer the Dividend income as taxable and can claim benefit of lower rate as per DTAA, if applicable. Also, they can now look at claiming FTC in their country of residence on the Dividend income subject to fulfillment of relevant conditions.

The proposal in the budget to tax dividends in the hands of the investor may trigger shift of investment from Dividend yield Mutual Funds to Growth Option Funds.

32. Rationalization of provisions of Start-Ups:

To rationalize the existing provision of section 80-IAC it is proposed to allow deduction under Section 80-IAC of the Act to an eligible start-up for a period of Ten years from the existing Seven years.

Further, the Finance Minister has proposed to relax the condition of Turnover from Rs.25 Crores to Rs.100 Crores to facilitate more Start-ups to take benefit of this provision It may kindly be noted that the above benefit is applicable only to eligible start-up companies and not for all start-up companies.

33. Increased reliance on technology to reduce interface between Assessee and Department-Provision for E-Appeals/ E-Penalty/ E-Assessment: 

In continuation to the Government’s initiative of conducting faceless E-assessment proceedings in respect of scrutiny assessments which was launched last year; the same is now proposed to be extended to appeals filed before Commissioner of Income Tax (Appeals) to being in transparency, accountability and efficiency in appellate proceedings.

Initiating concept of E-Penalty on lines similar to E-Assessments to reduce person-to-person contact between the taxpayer and the Income-tax Department authorities.

Further, it is proposed to expand the scope of E-assessment Scheme, 2019 to include best judgement assessment orders passed under Section 144 of the Act.

Necessary amendments are proposed in Section 250, Section 274 and Section 143 of the Act in this regard.

34. Making Pre-deposit compulsory for grant of Stay of Demand by the Income Tax Appellate Tribunal: 

Hitherto, the Income Tax Appellate Tribunal (‘ITAT’) had the authority to grant complete stay of demand in appropriate cases as it thinks fit, for a period of 180 days at a time (extendable by further period of 180 days). 

However, now the Finance Minister has proposed amend Section 254 of the Act to provide that for the purpose of obtaining Stay of Demand from the ITAT, the Assessee would have to deposit of 20% of the disputed demand (i.e. 20% of Tax, Interest, fee, Penalty or any other sum payable) or provide a security of equivalent amount.

This amendment would be effective from 1^st April 2020, so it would apply to existing cases where Stay of demand is granted by ITAT without making any pre-deposit/ pre-deposit of less than 20% and application is made for renewal/ extension of Stay.

The above amendment would benefit the Department in terms of revenue collection on pending appeals but it would lead to financial hardships in deserving/ genuine cases of high pitched/ arbitrary assessments wherein Assessee’s would be compelled to move to High Court by way of Writ Petition to seek complete stay of demand.  

35. Changes in criteria for treating an Individual as Non-Resident/ Resident but not Ordinarily Resident:

The Finance Minister has proposed to reduce the number of days an Individual can stay in India from 182 days to 120 days in a financial year such that he continues to retain status as Non-resident India for that financial year.

Further, the Finance Minister has also proposed to treat any individual who is citizen of India or person of Indian origin as a resident for the purpose of taxation; if such person is not a resident of any other country/ territory.

Also, the Finance Minister has proposed to alter the condition of treating an Individual as Resident but not ordinarily Resident, if his status is non-resident in Seven out preceding Ten years (as against the existing condition of being non-resident for Nine out preceding Ten years or aggregate stay in India in previous ten years does not exceed 729 days). 

36. Rationalization of provisions of Dispute Resolution Panel:

The Finance Minister has now proposed to provide the option of approaching the Dispute Resolution Panel (‘DRP’) to all non-resident Assessee’s which benefit was hitherto only available to foreign companies under the existing law.

Further, it is proposed to permit an eligible Assessee under Section 144C of the Act to approach DRP on any variation proposed by the Officer.

37. Penalty for Fake Invoices:

In order to curb the malpractices of fake invoices being obtained without the actual supply of goods/ services stated therein, it is proposed to levy new penalty on a person which would be equal to the aggregate amount of false entries found or omission of any entry relevant for computation of income.

Also, it is proposed 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 be liable for penalty which is equal to the aggregate amounts of such false entries or omitted entries.

38. Aligning provisions of domestic law with the Preamble of Multilateral Instrument (‘MLI’): 

To remove any controversy as to applicability of anti-abuse provisions in the Double Tax Avoidance Agreements (‘DTAA’s) read with MLI vis-à-vis the domestic law which does not contain specific provision in this regard; it is now proposed to insert the relevant Preamble in MLI in Section 90/ Section 90A of the Act. 

39. Others: 

The following amendments are proposed: 

> Introducing concept of Annual Information Statement in place of existing Form No.26AS to capture detail of various transactions including sale/purchase of immovable property, share transactions, exempt incomes etc. and make it available to Assessee for filing of the return of income and calculating his correct tax liability;

> To allow entities holding registration under Section 12A/ 12AA to apply for notification under Section 10(46).

> To continue promoting purchase of affordable housing, the period of sanctioning of loan by the financial institution is proposed to be extended to 31st March, 2021 to enable more people to take benefit of deduction under Section 80EEA. Corresponding amendment is also proposed in Section 80-IBA of the Act, which provides incentive to developer of ‘affordable houses’ to align with the definition prescribed under GST law.

> Introducing requirement to do TCS @5% (or 10% in non-PAN/ Aadhar cases) on remittances made out of India through Liberalized Remittance Scheme aggregating to Rs.7 Lakhs or more in a financial year;

> Introducing requirement to do TCS @5% (or 10% in non-PAN/ Aadhar cases) on and on sale of overseas tour package;

> Introducing requirement to do TCS @5% (or 10% in non-PAN/ Aadhar cases) on and on sale of overseas tour package;

> Introducing requirement to do TCS by seller of goods @0.1% (or 1% in non-PAN/ Aadhar cases) on sale of goods to a buyer exceeding Rs.50 Lakhs. This requirement of TCS would only apply for those sellers, whose turnover exceeds Rs.10 Crores in preceding financial year;

> 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;

> to enable any other person, as may be prescribed by the Board, to appear as an authorized representative of Assessee.

II. INDIRECT TAXES

Key amendments proposed in respect to Goods and Service Tax are stated hereunder:

• The Finance Minister has proposed retrospective amendments effective from 1^st July 2017 prescribe the manner and time limit for taking transitional credit. filing by Form Tran-1.
• The Government’s power to issue Orders for the removal of difficulties in giving effect to the provisions of the GST laws is proposed to be extended until June 30^th June 2022.
• Stringent penalty is proposed to curb fake Input Tax Credit (‘ITC’) for person who commits/ facilitates in committing specified offence and also on the beneficiary.
• It is proposed to empower the Commissioner and Additional Commissioner to extend the period of time within which a person can apply for revocation of registration cancellation.
• It has been proposed to delink the date of debit notes from the date of issuance of underlying invoice for availing ITC.
• It has been proposed to exclude from the ambit of the composition scheme, the following categories of taxable person, engaged in making:

1. Supply of services not leviable to tax; or

2. Inter-State outward supply of services; or

3. Outward supply of services through an e-commerce operator.

• It is proposed to provide that the transfer of business assets without consideration shall not be deemed as supply of goods or services or both from a retrospective effect, i.e. from 1^st July 2017.

(Compiled By Partners of ‘B. S. Shah & Co., Chartered Accountant’ Namely (i) Bhupendra Shah -B.Com., L.L.B. (SP.), A.C.S., F.C.A. (ii) N. Krishnakumar- B.Com., F.C.A., Grad CWA and (iii) Shreyam Shah -B.Com. A.C.A.,DISA)